CHAPTER 16

Aggregate Sales &

Operations Planning
Tata McGraw

Learning Outcomes

After discussion of this chapter students

should be able to:
Develop an aggregate plan for the resources
Adopt a chase strategy
Adopt a level strategy
Assist the upper-middle-level managers in
formulating SOP in their respective jobs

16-3

OBJECTIVES
Sales and Operations Planning
The Aggregate Operations Plan
Examples on Chase and Level strategies

16-4

Process planning
Long
range

Supply network
planning

Strategic capacity
planning

Forecasting and
demand management

Sales and operations

(aggregate) planning
Sales
plan

Medium
range

Manufacturing
Master scheduling
Material requirements
planning

Order scheduling
Short
range

Logistics

Aggregate
operations
plan

Services

Vehicle capacity
planning
Vehicle loading
Vehicle dispatching
Warehouse
receipt
planning

Weekly workforce
scheduling

Daily workforce
scheduling
1-4

16-5

Sales and Operations Planning horizons

Long-range planning

Greater than one year planning horizon

Usually performed in annual increments

Medium-range planning

Six to eighteen months

Usually with weekly, monthly or quarterly
increments

Short-range planning

One day to less than six months

Usually with weekly or daily increments

16-6

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 intermediaterange planning period of 3 to18 months

16-7

Balancing Aggregate Demand

and Aggregate Production Capacity

Suppose
Supposethe
thefigure
figureto
to
the
theright
rightrepresents
represents
forecast
forecastdemand
demandin
in
units
units
Now
Nowsuppose
supposethis
this
lower
lowerfigure
figurerepresents
represents
the
theaggregate
aggregatecapacity
capacity
of
ofthe
thecompany
companyto
to
meet
meetdemand
demand

10000

10000

8000

8000
6000

7000
6000

5500
4500

4000
2000
0
Jan

Feb

Mar
9000

10000

Apr

May

Jun

8000

8000

What
Whatwe
wewant
wantto
todo
dois
is
balance
balanceout
outthe
the
production
productionrate,
rate,
workforce
workforcelevels,
levels,and
and
inventory
inventoryto
tomake
make
these
thesefigures
figuresmatch
matchup
up

6000

6000
4500

4000

Jan

Feb

4000

4000
2000
0
Mar

Apr

May

Jun

16-8

Required Inputs to the Production Planning System

Competitors
behavior
External
capacity

Current
physical
capacity

Raw material
availability

Planning
for
production

Current
workforce

Inventory
levels

Market
demand

External
to firm

Economic
conditions

Activities
required
for
production

Internal
to firm

16-9

Key Strategies for Meeting Demand

Chase strategy
Stable workforce (variable work hrs)
Level strategy
Mixed strategy
Subcontracting

16-10

Relevant Costs

Basic production cost

Fixed-variable, direct-indirect labor, regular-overtime

Costs associated with change in production rate

Hiring (regular / temporary), training, laying-off

Inventory holding cost

Cost of capital tied-up, storing, insurance, taxes,
spoilage, pilferage, obsolescence

Back ordering cost

Expediting, loss of goodwill, loss of sales

16-11

Aggregate Planning Examples: Unit Demand and Cost Data

Suppose
Supposewe
wehave
havethe
thefollowing
followingunit
unit
demand
demandand
andcost
costinformation:
information:
Demand/mo Jan Feb Mar Apr May
4500

5500

7000

Jun

10000

8000

6000

Materials
$5/unit
Holding costs
$1/unit per mo.
Marginal cost of stockout
$1.25/unit per mo.
Hiring and training cost
$200/worker
Layoff costs
$250/worker
Labor hours required
.15 hrs/unit
Straight time labor cost
$8/hour
Beginning inventory
250 units
Productive hours/worker/day
7.25
Paid straight hrs/day
8

16-12

Cut-and-Try Example: Determining

Straight Labor Costs and Output
Given
Giventhe
thedemand
demandand
andcost
costinformation
informationbelow,
below,what
what
are
arethe
theaggregate
aggregatehours/worker/month,
hours/worker/month,units/worker,
units/worker,and
and
dollars/worker?
dollars/worker?
Demand/mo
4500

Jan Feb Mar Apr May Jun

5500

7000

Productive hours/worker/day 7.25

Paid straight hrs/day
8

22x8hrsx$8=$1408

10000

8000

6000

7.25 x 22 = 159.5
7.25 / 0.15=48.33 &
48.33x22=1063.33

Chase Strategy

16-13

(Hiring & Firing to meet demand)

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

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

J an
22
159.5
1,063.33
$1,408

J an
4,500
250
4,250
3.997
3
4
0

Lets
Letsassume
assumeour
ourcurrent
currentworkforce
workforceis
is77workers.
workers.

First, calculate net requirements for

production, or 4500-250=4250 units
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.

16-14

Below
Beloware
arethe
thecomplete
completecalculations
calculationsfor
forthe
theremaining
remaining
months
monthsin
inthe
thesix
sixmonth
monthplanning
planninghorizon
horizon
Days/mo
Hrs/worker/mo
Units/worker
$/worker

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

J an
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

J un
20
145
967
1,280

J an
4,500
250
4,250
3.997

Feb
5,500

Mar
7,000

Apr
10,000

May
8,000

J un
6,000

5,500
5.989
2

7,000
6.897
1

10,000
9.852
3

8,000
7.524

6,000
6.207

2
8
0

1
7
0

3
4
0

6
0

7
0

10
0

16-15

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

Material
Labor
Hiring cost
Firing cost

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

Feb
5,500

Mar
7,000

Apr
10,000

May
8,000

Jun
6,000

5,500
5.989
2

7,000
6.897
1

10,000
9.852
3

8,000
7.524

6,000
6.207

2
8
0

1
7
0

6
0

7
0

10
0

Jan
Feb
Mar
Apr
May
Jun
$21,250.00 $27,500.00 $35,000.00 $50,000.00 $40,000.00 $30,000.00
5,627.59 7,282.76 9,268.97 13,241.38 10,593.10 7,944.83
400.00
200.00
600.00
750.00
500.00
250.00

Costs
203,750.00
53,958.62
1,200.00
1,500.00
$260,408.62

16-16

Level Workforce Strategy (Surplus and Shortage Allowed)

Lets
Letstake
takethe
thesame
sameproblem
problemas
as
before
beforebut
butthis
thistime
timeuse
usethe
the
Level
LevelWorkforce
Workforcestrategy
strategy
This
Thistime
timewe
wewill
willseek
seekto
touse
use
aaworkforce
workforcelevel
levelof
of66workers
workers

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

J an
4,500
250
4,250
6
6,380
2,130
2,130

16-17

Below
Below are
arethe
thecomplete
completecalculations
calculationsfor
for the
theremaining
remaining
months
monthsin
inthe
thesix
sixmonth
month planning
planninghorizon
horizon

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

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

May
8,000
-2,680
10,680
6
6,380
-1,300

Jun
6,000
-1,300
7,300
6
5,800
-1,500

2,680

1,300

1,500

Note,
Note, ifif we
we recalculate
recalculate this
this sheet
sheet with
with 77 workers
workers
we
we would
would have
have aa surplus
surplus

Below
Below are
are the
the complete
complete calculations
calculations for
for the
the
remaining
remaining months
months in
in the
the six
six month
month planning
planning
horizon
horizon with
with the
the other
other costs
costs included
included
Jan
4,500
250
4,250
6
6,380
2,130
2,130

Jan
$8,448
31,900
2,130

Feb
5,500
2,130
3,370
6
5,510
2,140
2,140

Feb
$7,296
27,550
2,140

Mar
7,000
10
4,860
6
6,090
1,230
1,230

Mar
$8,064
30,450
1,230

Apr
10,000
-910
8,770
6
6,090
-2,680

May
8,000
-3,910
10,680
6
6,380
-1,300

Jun
6,000
-1,620
7,300
6
5,800
-1,500

2,680

1,300

1,500

Apr
$8,064
30,450

May
$8,448
31,900

Jun
$7,680
29,000

3,350

1,625

1,875

16-18

Note,
Note, total
total
costs
costsunder
under
this
this strategy
strategy
are
are less
lessthan
than
Chase
Chase at
at
$260.408.62
$260.408.62
$48,000.00
181,250.00
5,500.00
6,850.00

Labor cost
Material ,,
Storage ,,
Stockout ,,

$241,600.00 Total cost

16-19

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)

16-20

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

16-21

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

16-22

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.)

16-23

End of Chapter 16