Ch 13

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Operations
Management
Aggregate Planning
Chapter 13

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Outline
GLOBAL COMPANY PROFILE: ANHEUSER-
BUSCH
THE PLANNING PROCESS
THE NATURE OF AGGREGATE PLANNING
AGGREGATE PLANNING STRATEGIES
 Capacity Options
 Demand Options
 Mixing Options to Develop a Plan

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Outline - Continued
METHODS FOR AGGREGATE PLANNING
 Graphical and Charting Methods
 Mathematical Approaches to Planning
 Comparison of Aggregate Planning Methods
AGGREGATE PLANNING IN SERVICES
 Restaurants
 Hospital
 Miscellaneous Services
 National Chains of Small Service Firms
 Airline Industry
 YIELD MANAGEMENT

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Learning Objectives
When you complete this chapter, you should be
able to :
 Identify or Define:
 Aggregate planning
 Tactical scheduling
 Graphic technique for aggregate planning
 Mathematical techniques for aggregate planning
 Describe or Explain:
 How to do aggregate planning
 How service firms develop aggregate plans

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Anheuser-Busch
Anheuser-Busch produces nearly 40% of the beer
consumed in the U.S.
Matches fluctuating demand by brand to specific
plant, labor, and inventory capacity
High facility utilization requires
 meticulous cleaning between batches
 effective maintenance
 efficient employees
 efficient facility scheduling

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Aggregate Planning Requires
Logical overall unit for measuring sales and
outputs
Forecast of demand for intermediate planning
period in these aggregate units
Method for determining costs
Model that combines forecasts and costs so that
planning decisions can be made

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 Setting goals & objectives
 Example: Meet demand within the limits
of available resources at the least cost
 Determining steps to achieve goals
 Example: Hire more workers
 Setting start & completion dates
 Example: Begin hiring in Jan.; finish, Mar.
 Assigning responsibility
Planning

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Planning Tasks and Responsibilities

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Planning Horizons
Today 3 Months 1 year 5 years
Planning Horizon
Short-range plans
Job assignments
Ordering
Job scheduling
Dispatching
Intermediate-range plans
Sales planning
Production planning and
budgeting
Setting employment, inventory,
subcontracting levels
Analyzing operating plans
Long-range plans
R&D
New product plans
Capital expenses
Facility location, expansion
Responsible:
Operations
managers,
supervisors,
foremen
Responsible:
Operations
managers
Responsible:
Top executives

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Relationships of the Aggregate Plan
Aggregate
Plan for
Production
Demand
Forecasts,
orders
Master
Production
Schedule, and MRP systems
Detailed Work
Schedules
External
Capacity
Subcontractors
Inventory On
Hand
Raw Materials
Available
Work Force
Marketplace
and Demand
Research and
Technology
Product
Decisions
Process
Planning & Capacity
Decisions

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A mathematically based aggregate planning model requires
considerable:
 time
 problem definition
 model development
 model verification
 model application
 expertise
 people who understand the problem
 people who understand both the modeling process, and the
specific model
 money
 money to pay for all of the above
 often requires funding for several people for several months!
What’s Needed for Aggregate
Planning

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 Provides the quantity and timing of production for
intermediate future
 Usually 3 to 18 months into future
 Combines (‘aggregates’) production
 Often expressed in common units
 Example: Hours, dollars, equivalents
(e.g., FTE students)
 Involves capacity and demand variables
Aggregate Planning

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 Meet demand
 Use capacity efficiently
 Meet inventory policy
 Minimize cost
 Labor
 Inventory
 Plant & equipment
 Subcontract
Aggregate Planning Goals

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Aggregate Planning Strategies
Pure Strategies
 Capacity Options — change capacity:
 changing inventory levels
 varying work force size by hiring or layoffs
 varying production capacity through overtime or idle
time
 subcontracting
 using part-time workers

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Aggregate Planning Strategies
Pure Strategies
 Demand Options — change demand:
 influencing demand
 backordering during high demand periods
 counterseasonal product mixing

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Aggregate Scheduling Options -
Advantages and Disadvantages
Option Advantage Disadvantage Some
Comments
Changing
inventory levels
Changes in
human resources
are gradual, not
abrupt
production
changes
Inventory
holding costs;
Shortages may
result in lost
sales
Applies mainly
to production,
not service,
operations
Varying
workforce size
by hiring or
layoffs
Avoids use of
other alternatives
Hiring, layoff,
and training
costs
Used where size
of labor pool is
large

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Option Advantage Disadvantage Some
Comments
Varying
production rates
through overtime
or idle time
Matches seasonal
fluctuations
without
hiring/training
costs
Overtime
premiums, tired
workers, may not
meet demand
Allows
flexibility within
the aggregate
plan
Subcontracting Permits
flexibility and
smoothing of the
firm's output
Loss of quality
control; reduced
profits; loss of
future business
Applies mainly
in production
settings
Advantages/Disadvantages -
Continued

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Advantages/Disadvantages -
Continued
Option Advantage Disadvantage Some
Comments
Using part-time
workers
Less costly and
more flexible
than full-time
workers
High
turnover/training
costs; quality
suffers;
scheduling
difficult
Good for
unskilled jobs in
areas with large
temporary labor
pools
Influencing
demand
Tries to use
excess capacity.
Discounts draw
new customers.
Uncertainty in
demand. Hard to
match demand to
supply exactly.
Creates
marketing ideas.
Overbooking
used in some
businesses.

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Advantage/Disadvantage -
Continued
Option Advantage Disadvantage Some
Comments
Back ordering
during high-
demand periods
May avoid
overtime. Keeps
capacity constant
Customer must
be willing to
wait, but
goodwill is lost.
Many companies
backorder.
Counterseasonal
products and
service mixing
Fully utilizes
resources; allows
stable workforce.
May require
skills or
equipment
outside a firm's
areas of
expertise.
Risky finding
products or
services with
opposite demand
patterns.

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The Extremes
Level
Strategy
Chase
Strategy
Production
equals
demand
Production rate
is constant

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 Mixed strategy
 Combines 2 or more aggregate scheduling options
 Level scheduling strategy
 Produce same amount every day
 Keep work force level constant
 Vary non-work force capacity or demand options
 Often results in lowest production costs
Aggregate Planning Strategies

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 Graphical & charting techniques
 Popular & easy-to-understand
 Trial & error approach
 Mathematical approaches
 Transportation method
 Linear decision rule
 Management coefficients model
 Simulation
Aggregate Planning Methods

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The Graphical Approach to
Aggregate Planning
 Forecast the demand for each period
 Determine the capacity for regular time, overtime,
and subcontracting, for each period
 Determine the labor costs, hiring and firing costs,
and inventory holding costs
 Consider company policies which may apply to the
workers or to stock levels
 Develop alternative plans, and examine their total
costs

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Forecast and Average Forecast
Demand
0
10
20
30
40
50
60
70
Production
rate
per
working
day
Jan Feb Mar Apr May Jun
Forecast
Demand
Level production using
average monthly
forecast demand
22 18 21 21 22 20

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Cumulative Demand Graph for
Plan 1
Jan Feb Mar Apr May Jun
Cumulative forecast
requirements
Cumulative level
production using
average monthly
forecast
requirements
Reduction of
inventory
Excess inventory
Cumulative
Demand
(Units) 7,000
6,000
5,000
4,000
3,000
2,000
1,000

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Farnsworth’s Transportation Table
Period 1
(Mar)
Period 2
(Apr)
Period 3
(May)
Unused Capacity
(Dummy)
Total Capacity Available
(Supply)
Beginning
Inventory
0
100
2 4 0
100
Regular 40
700
42 44 0
700
Overtime 50 52
50
54 0
50
Subcontract 70 72
150
74 0
150
Regular X 40
700
42 0
700
Overtime
X
50
50
52 0
50
Subcontract
X
70
50
72 0
100 150
Regular
X X
40
700
0
700
Overtime
X X
50
50
0
50
Subcontract
X x
70 0
130
Total Demand 800 1000 750 230 2780
Period
3
Period
2
Period
1

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Comparison of Three Major
Aggregate Planning Methods
Charting/graphical
methods
Transportation method
Management
coefficient model
Trial and error
Optimization
Heuristic
Simple to understand, easy to
use. Many solutions; one
chosen may not be optimal
LP software available;permits
sensitivity analysis and
constraints. Linear function
may not be realistic
Simple, easy to implement;
tries to mimic manager’s
decision process; uses
regression
Techniques Approaches Aspects

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Controlling the Cost of Labor in
Service Firms
Seek:
 Close control of labor hours to ensure quick response
to customer demand
 On-call labor resource that can be added or deleted to
meet unexpected demand
 Flexibility of individual worker skills to permit
reallocation of available labor
 Flexibility of individual worker in rate of output or hours
of work to meet demand

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Making Yield Management Work
Multiple pricing structures must be feasible and
appear logical
Forecast the use and duration of use.
Manage the changes in demand.

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Hotel: Single Price Level
$15 variable cost
of room
$150 Price
charged for room
Price
Sales
$sales = Net price
* 50 rooms
=150*50
=$7500
Demand Curve
Passed up
profit
contributions
Money left
on the table
Potential customers exist who are willing
to pay more than the $15 variable cost
Some customers who
paid $150 for the room
were actually willing to
pay more

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Hotel: Two Price Levels
$15 variable
cost of room
Demand
Sales
$100
Price #1
$200
Price #2
Total sales =
1st net price *30 +
2nd net price *30
= $8100
Net prices are:
Price #1 => $85
Price #2 => $175

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Yield Management Matrix
Fixed Variable
D
u
r
a
t
I
o
n
o
f
u
s
e
Predictable
use
Quadrant 1
Movies, stadiums,
arenas, convention
centers, hotel
meeting space
Quadrant 2
Hotels, Airlines,
Rental
cars,Cruise
lines
Unpredictable
use
Quadrant 3
Restaurants,Golf
courses, Internet
service providers
Quadrant 4
Continuing care
hospitals