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Management
Aggregate Planning
Chapter 13
1
Outline
Figure 13.1
Sales and Operations Planning (S&OP)
▶ Coordination of demand forecasts with
functional areas and the supply chain
▶ Typically done by cross-functional teams
▶ Determine which plans are feasible
▶ Limitations must be reflected
▶ Provides warning when resources do not
match expectations
▶ Output is an aggregate plan
Sales and Operations Planning (S&OP)
▶ Decisions must be tied to strategic planning
and integrated with all areas of the firm over
all planning horizons
▶ S&OP is aimed at
1. The coordination and integration of the
internal and external resources necessary
for a successful aggregate plan
2. Communication of the plan to those
charged with its execution
Sales and Operations Planning
▶ Requires
▶ A logical overall unit for measuring sales
and output
▶ A forecast of demand for an intermediate
planning period in these aggregate terms
▶ A method for determining relevant costs
▶ A model that combines forecasts and costs
so that scheduling decisions can be made
for the planning period
Aggregate Planning
(or Aggregate Scheduling)
Aggregate Planning is a high level approach
to planning. It translates annual and
quarterly business plans into intermediate
term production plans.
Objective:
- To meet forecasted demand while minimizing cost
over the planning period
Provides the quantity and timing of
production for intermediate future
Usually 3 to 18 months into future
Combines (‘aggregates’) production
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Aggregate Planning
QUARTER 1
Jan. Feb. March
150,000 120,000 110,000
QUARTER 2
April May June
100,000 130,000 150,000
QUARTER 3
July Aug. Sept.
180,000 150,000 140,000
Aggregate Planning
In manufacturing organizations
aggregate planning means determining
the size of the work-force, the rate of
production and inventory level that are
needed to implement a production plan.
In service organizations aggregate
planning means scheduling staff to meet
customers' service needs.
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S&OP
and the
Aggregate
Plan
Figure 13.2
Steps in Planning Process
Forecasting the demand for the planning period:
Total demand for each product is aggregated.
Determination of the aggregate production plan:
Production and work-force levels, as well as production
capacity requirements are determined.
Determination of the Master Production Schedule
(MPS):
Production levels by product type by time period over the
planning horizon are calculated.
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Steps in Planning Process
Material Requirements Planning (MRP):
The master production schedule is “exploded" to obtain
requirements for sub-assemblies, components and raw
materials for each time period.
Determination of the detailed job shop schedule:
Detailed production schedules for components, sub-
assemblies and final products and order quantities for
raw materials are determined to meet the specification of
production quantities from the MRP system.
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Aggregate Planning Goals
Meet demand
Meet inventory policy
Use capacity efficiently
Minimize cost
Labor
Inventory
Plant & equipment
Subcontract
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Relevant Costs
Hiring/firing costs:
Hiring costs - recruitment, screening, training
Lower initial productivity
Firing costs - severance, employee benefits, redeployment of remaining
work-force
Ill will, loss of morale.
Overtime/idle time costs:
Overtime costs - overtime premiums
Health costs
Idle time costs - opportunity cost.
Part time/temporary labour costs:
Lower rates and benefits, but possibly lower productivity.
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Relevant Costs
Subcontracting costs:
Usually more costly than in-house manufacture.
Cooperative arrangement costs:
Usually lower cost.
Inventory carrying costs:
Storage, financial opportunity cost, insurance, obsolescence;
Breakage, spoilage, deterioration.
Back order or stockout costs:
Loss of goodwill (for back orders), loss of sales (for
stockouts).
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Aggregate Planning Strategies
1. Should inventories be used to absorb
changes in demand?
2. Should changes be accommodated by
varying the size of the workforce?
3. Should part-timers, overtime, or idle time be
used to absorb changes?
4. Should subcontractors be used and
maintain a stable workforce?
5. Should prices or other factors be changed to
influence demand?
AGGREGATE SCHEDULING OPTIONS
(Aggregate Planning Pure Strategies)
Capacity Demand
Inventory Promotion & price
Hire or layoff Back ordering
Overtime or idle Counterseasonal
time product mixing
Subcontract
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Part-time workers
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Capacity Options
1. Changing inventory levels
▶ Increase inventory in low demand periods
to meet high demand in the future
▶ Increases costs associated with storage,
insurance, handling, obsolescence, and
capital investment
▶ Shortages may mean lost sales due to
long lead times and poor customer service
Capacity Options
2. Varying workforce size by hiring or
layoffs
▶ Match production rate to demand
▶ Training and separation costs for
hiring and laying off workers
▶ New workers may have lower
productivity
▶ Laying off workers may lower morale
and productivity
Capacity Options
3. Varying production rates through
overtime or idle time
▶ Allows constant workforce
▶ May be difficult to meet large increases
in demand
▶ Overtime can be costly and may drive
down productivity
▶ Absorbing idle time may be difficult
Capacity Options
4. Subcontracting
▶ Temporary measure during periods of peak
demand
▶ May be costly
▶ Assuring quality and timely delivery may be
difficult
▶ Exposes your customers to a possible
competitor
Varying Avoids the costs Hiring, layoff, and Used where size
workforce of other training costs may of labor pool is
size by alternatives. be significant. large.
hiring or
layoffs
Aggregate Planning Options
TABLE 13.1 Aggregate Planning Options
OPTION ADVANTAGES DISADVANTAGES COMMENTS
Varying Matches seasonal Overtime premiums; Allows flexibility
production fluctuations tired workers; may within the
rates without hiring/ not meet demand. aggregate plan.
through training costs.
overtime or
idle time
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Step # 3: Graphical method
A chase strategy involves changing the production rates
or work-force levels to match the demand forecast for
each period. Inventory is not used to absorb demand
fluctuations. Favored by many service organizations.
A level strategy involves the maintaining of a constant daily
production rate and work-force level for the duration of the
plan. Inventory is built up during periods of less than average
demand; alternatively, delivery lead times may be allowed to
grow during periods of high demand. Stable production leads
to better quality and productivity
A mixed strategy involves periodic fluctuations in both
inventory levels and in work-force and production rates.
Level Chase
Strategy Strategy
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Step # 3: Graphical Method
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Step # 3: Mathematical Methods
Transportation Method/Linear Programming
Produces an optimal plan
Management Coefficients Model
Model built around manager’s experience and
performance
Other Models
Linear Decision Rule
Simulation
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Step # 3: Mathematical Methods
38
Step # 3: Mathematical Methods