Chapter 13 Aggregate Planning Operations Management by R

Chapter 13 – Aggregate Planning Operations Management by R. Dan Reid & Nada R. Sanders 2 nd Edition © Wiley 2005 Power. Point Presentation by R. B. Clough - UNH

What is Aggregate Planning? Aggregate planning is intermediaterange (2 to 12 months) capacity planning useful in particular for organizations that experience seasonal or other fluctuation in demand. The goal of aggregate planning is to effectively utilize the organization’s resources to satisfy expected demand.

The Role of the Aggregate Plan

The Concept of Aggregation Aggregate planning is a “big picture” approach that does not focus on individual products or services. Instead, the focus is on groups of similar products of an entire product line. Examples: n n Total number of bikes produced Total number of customers served

Responses to Demand Fluctuations n n Demand-based options are intended to alter (smooth) the pattern of the demand. Capacity-based options to alter capacity to better match the demand.

Demand-based Options n Finished goods inventories: n n Back orders & lost sales: n n Delay delivery or allow demand to go unfilled when demand exceeds capacity Shift demand to off-peak times: n n To meet anticipate high demand Proactive marketing: pricing, promotions Create new (complementary) demand

Capacity-based Options n Overtime: Short-term option n n Idle time: Short-term option n Pay workers a premium to work longer hours Slow the production rate or send workers home early (lowers labor productivity, but doesn’t tie up capital in finished good inventories) Subcontracting: Medium-term option Hire & fire workers: Long-term option n Change the size of the workforce

Aggregate Plan Strategies n Level plans: n n n Use a constant workforce & produce similar quantities each time period. Use inventories & backorders to absorb demand peaks & valleys Chase plans: n Minimize finished good inventories by trying to keep pace with demand fluctuations

Hybrid Strategies n Use a combination of options: n n Build-up inventory ahead of rising demand & use backorders to level extreme peaks Layoff or furlough workers during lulls Subcontract production or hire temporary workers to cover short-term peaks Reassign workers to preventive maintenance during lulls

Developing Aggregate Plan n Choose the basic strategy: n n Level, chase, or hybrid Determine the production rate: n n n Level plan with back orders: rate = average demand over the planning horizon Level plan without back orders: rate is set to meet all demand on time Chase plan: assign regular production, amount of overtime & subcontracted work to meet demand

Developing the Aggregate Plan n n Calculate the size of the workforce needed Calculate period-to-period inventory levels, shortages, expected hiring & firings, and overtime Calculate period-by-period costs, then sum for total costs of the plan Evaluate the plan’s impact on customer service and human resource issues

Evaluating Alternative Plans n n Level strategy plan Chase strategy plan

Aggregate Planning Example

Aggregate Planning Template

Level Strategy

Non-Financial Criteria n Operations perspective: n n Human resources perspective: n n Smooth & even flow is easy to manage Nobody hired or fired, no overtime or furloughs, so employee morale should be fine Marketing perspective: n All demand met, so no customer service issues

Chase Strategy

Non-Financial Criteria n Operations perspective: n n n Human resources perspective: n n n Can operations ramp up & back down this quickly? Much more difficult to accomplish Will employees tolerate being hired & fired so rapidly? What about training & learning curve issues? Marketing perspective: n All demand is met (assuming no strikes)

A Minimum Cost Plan (Hybrid Strategy)

Aggregate Planning Bottom Line n n n The Aggregate plan must balance several perspectives Costs are important but so are: n Customer service n Operational effectiveness n Workforce morale A successful AP considers each of these factors

Service Planning Issues n n Intangible products can’t be inventoried Possible approaches: n n n Try to proactively shift demand away from peaks Use overtime or subcontracting to handle peaks Allow lost sales

Chapter 13 HW Assignment Problems 1 – 5, 10 -12.