Chapter 4

Slide 1: 

Operations Management Session 4 – Aggregate Planning

Outline : 

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

Outline – Continued : 

Outline – Continued Methods for Aggregate Planning Graphical Methods Mathematical Approaches Comparison of Aggregate Planning Methods

Outline – Continued : 

Outline – Continued Aggregate Planning in Services Restaurants Hospitals National Chains of Small Service Firms Miscellaneous Services Airline Industry Yield Management

Learning Objectives : 

Learning Objectives When you complete this chapter you should be able to: Define aggregate planning Identify optional strategies for developing an aggregate plan Prepare a graphical aggregate plan

Learning Objectives : 

Learning Objectives When you complete this chapter you should be able to: Solve an aggregate plan via the transportation method of linear programming Understand and solve a yield management problem

Anheuser-Busch : 

Anheuser-Busch Anheuser-Busch produces nearly 40% of the beer consumed in the U.S. Matches fluctuating demand by brand to plant, labor, and inventory capacity to achieve high facility utilization High facility utilization requires Meticulous cleaning between batches Effective maintenance Efficient employee and facility scheduling

Anheuser-Busch : 

Anheuser-Busch Product-focused facility with high fixed costs High utilization requires effective aggregate planning of the four basic stages of production Selection and delivery of raw materials Brewing process from milling to aging Packaging Distribution

Aggregate Planning : 

Aggregate Planning Objective is to minimize cost over the planning period by adjusting Production rates Labor levels Inventory levels Overtime work Subcontracting rates Other controllable variables Determine the quantity and timing of production for the immediate future

Aggregate Planning : 

Aggregate Planning 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 costs A model that combines forecasts and costs so that scheduling decisions can be made for the planning period Required for aggregate planning

The Planning Process : 

The Planning Process Figure 13.1

Aggregate Planning : 

Aggregate Planning

Aggregate Planning : 

Aggregate Planning Figure 13.2

Aggregate Planning : 

Aggregate Planning Combines appropriate resources into general terms Part of a larger production planning system Disaggregation breaks the plan down into greater detail Disaggregation results in a master production schedule

Aggregate Planning Strategies : 

Aggregate Planning Strategies Use inventories to absorb changes in demand Accommodate changes by varying workforce size Use part-timers, overtime, or idle time to absorb changes Use subcontractors and maintain a stable workforce Change prices or other factors to influence demand

Capacity Options : 

Capacity Options 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 15% to 40% Shortages can mean lost sales due to long lead times and poor customer service

Capacity Options : 

Capacity Options 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 : 

Capacity Options Varying production rate 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 : 

Capacity Options 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

Capacity Options : 

Capacity Options Using part-time workers Useful for filling unskilled or low skilled positions, especially in services

Demand Options : 

Demand Options Influencing demand Use advertising or promotion to increase demand in low periods Attempt to shift demand to slow periods May not be sufficient to balance demand and capacity

Demand Options : 

Demand Options Back ordering during high- demand periods Requires customers to wait for an order without loss of goodwill or the order Most effective when there are few if any substitutes for the product or service Often results in lost sales

Demand Options : 

Demand Options Counterseasonal product and service mixing Develop a product mix of counterseasonal items May lead to products or services outside the company’s areas of expertise

Aggregate Planning Options : 

Aggregate Planning Options Table 13.1

Aggregate Planning Options : 

Aggregate Planning Options Table 13.1

Aggregate Planning Options : 

Aggregate Planning Options Table 13.1

Aggregate Planning Options : 

Aggregate Planning Options Table 13.1

Methods for Aggregate Planning : 

Methods for Aggregate Planning A mixed strategy may be the best way to achieve minimum costs There are many possible mixed strategies Finding the optimal plan is not always possible

Mixing Options to Develop a Plan : 

Mixing Options to Develop a Plan Chase strategy Match output rates to demand forecast for each period Vary workforce levels or vary production rate Favored by many service organizations

Mixing Options to Develop a Plan : 

Mixing Options to Develop a Plan Level strategy Daily production is uniform Use inventory or idle time as buffer Stable production leads to better quality and productivity Some combination of capacity options, a mixed strategy, might be the best solution

Graphical Methods : 

Graphical Methods Popular techniques Easy to understand and use Trial-and-error approaches that do not guarantee an optimal solution Require only limited computations

Graphical Methods : 

Graphical Methods Determine the demand for each period Determine the capacity for regular time, overtime, and subcontracting each period Find labor costs, hiring and layoff costs, and inventory holding costs Consider company policy on workers and stock levels Develop alternative plans and examine their total costs

Roofing Supplier Example 1 : 

Roofing Supplier Example 1 Table 13.2

Roofing Supplier Example 1 : 

Roofing Supplier Example 1 Figure 13.3

Roofing Supplier Example 2 : 

Roofing Supplier Example 2 Table 13.3 Plan 1 – constant workforce

Roofing Supplier Example 2 : 

Roofing Supplier Example 2 Table 13.3 Plan 1 – constant workforce Total units of inventory carried over from one month to the next = 1,850 units Workforce required to produce 50 units per day = 10 workers

Roofing Supplier Example 2 : 

Roofing Supplier Example 2 Table 13.3 Total units of inventory carried over from one month to the next = 1,850 units Workforce required to produce 50 units per day = 10 workers

Roofing Supplier Example 2 : 

Roofing Supplier Example 2 Figure 13.4

Roofing Supplier Example 3 : 

Roofing Supplier Example 3 Table 13.2 Minimum requirement = 38 units per day Plan 2 – subcontracting

Roofing Supplier Example 3 : 

Roofing Supplier Example 3

Roofing Supplier Example 3 : 

Roofing Supplier Example 3 Table 13.3

Roofing Supplier Example 3 : 

Roofing Supplier Example 3 Table 13.3 In-house production = 38 units per day x 124 days = 4,712 units Subcontract units = 6,200 - 4,712 = 1,488 units

Roofing Supplier Example 3 : 

Table 13.3 Roofing Supplier Example 3 In-house production = 38 units per day x 124 days = 4,712 units Subcontract units = 6,200 - 4,712 = 1,488 units

Roofing Supplier Example 4 : 

Roofing Supplier Example 4 Table 13.2 Production = Expected Demand Plan 3 – hiring and firing

Roofing Supplier Example 4 : 

Roofing Supplier Example 4

Roofing Supplier Example 4 : 

Roofing Supplier Example 4 Table 13.3

Roofing Supplier Example 4 : 

Roofing Supplier Example 4 Table 13.3 Table 13.4

Comparison of Three Plans : 

Comparison of Three Plans Table 13.5 Plan 2 is the lowest cost option

Mathematical Approaches : 

Mathematical Approaches Useful for generating strategies Transportation Method of Linear Programming Produces an optimal plan Management Coefficients Model Model built around manager’s experience and performance Other Models Linear Decision Rule Simulation

Transportation Method : 

Transportation Method Table 13.6

Transportation Example : 

Transportation Example Important points Carrying costs are $2/tire/month. If goods are made in one period and held over to the next, holding costs are incurred Supply must equal demand, so a dummy column called “unused capacity” is added Because back ordering is not viable in this example, cells that might be used to satisfy earlier demand are not available

Transportation Example : 

Transportation Example Important points Quantities in each column designate the levels of inventory needed to meet demand requirements In general, production should be allocated to the lowest cost cell available without exceeding unused capacity in the row or demand in the column

Transportation Example : 

Transportation Example Table 13.7

Management Coefficients Model : 

Management Coefficients Model Builds a model based on manager’s experience and performance A regression model is constructed to define the relationships between decision variables Objective is to remove inconsistencies in decision making

Other Models : 

Other Models Linear Decision Rule Minimizes costs using quadratic cost curves Operates over a particular time period Simulation Uses a search procedure to try different combinations of variables Develops feasible but not necessarily optimal solutions

Summary of Aggregate Planning Methods : 

Summary of Aggregate Planning Methods Table 13.8

Summary of Aggregate Planning Methods : 

Summary of Aggregate Planning Methods Table 13.8

Aggregate Planning in Services : 

Aggregate Planning in Services Controlling the cost of labor is critical Accurate scheduling of labor-hours to assure quick response to customer demand An on-call labor resource to cover unexpected demand Flexibility of individual worker skills Flexibility in rate of output or hours of work

Five Service Scenarios : 

Five Service Scenarios Restaurants Smoothing the production process Determining the optimal workforce size Hospitals Responding to patient demand

Five Service Scenarios : 

Five Service Scenarios National Chains of Small Service Firms Planning done at national level and at local level Miscellaneous Services Plan human resource requirements Manage demand

Five Service Scenarios : 

Five Service Scenarios Airline industry Extremely complex planning problem Involves number of flights, number of passengers, air and ground personnel, allocation of seats to fare classes Resources spread through the entire system

Yield Management : 

Yield Management Allocating resources to customers at prices that will maximize yield or revenue Service or product can be sold in advance of consumption Demand fluctuates Capacity is relatively fixed Demand can be segmented Variable costs are low and fixed costs are high

Yield Management Example : 

Yield Management Example Figure 13.5

Yield Management Example : 

Total $ contribution =(1st price) x 30 rooms + (2nd price) x 30 rooms =($100 - $15) x 30 + ($200 - $15) x 30 = $2,550 + $5,550 = $8,100 Yield Management Example Figure 13.6

Yield Management Matrix : 

Yield Management Matrix Figure 13.7

Making Yield Management Work : 

Making Yield Management Work Multiple pricing structures must be feasible and appear logical to the customer Forecasts of the use and duration of use Changes in demand