Operations Management Aggregate Planning Chapter 13

1. Operations ManagementAggregate PlanningChapter 13 © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J. 07458

2. Aggregation Clustering goods or services that have similar demand requirements and common processing, labor, and materials requirements: Individual 1040’s Trust returns Small business returns Tax planning Estate planning # returns –or– # forms –or– # hours # clients –or– # consultations –or– # hours $ © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J. 07458

3. Responsibility Planning tasks and horizon Aggregate Planning Determining the quantity and timing of productionfor the intermediate future (3 – 18 months) © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J. 07458

4. Responsible: Operations managers 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 Responsible: Top executives Responsible: Operations managers, supervisors, foremen Long-range plans R&D New product plans Capital expenses Facility location, expansion 1 year 5 years Today 3 Months Planning Horizon Planning Horizons © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J. 07458

5. Operations Distribution and marketing Current machine capacities Customer needs Demand forecasts Plans for future capacities Workforce capacities Competition behavior Current staffing level Materials Accounting and finance Aggregate Supplier capabilities Cost data plan Storage capacity Financial condition Materials availability of firm Engineering Human resources Labor-market conditions New products Product design changes Training capacity Machine standards Inputs to Aggregate Plan © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J. 07458

6. Inputs to Aggregate Plan • Physical limitations / constraints • Managerial policy constraints © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J. 07458

7. Marketplace and Demand Research and Technology Product Decisions Process Planning & Capacity Decisions Demand Forecasts, orders Work Force Raw Materials Available Inventory On Hand Aggregate Plan for Production External Capacity Subcontractors Master Production Schedule, and MRP systems Detailed Work Schedules Relationships of the Aggregate Plan © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J. 07458

8. Aggregate Planning Goals • Meet demand(maximize customer service) • Use capacity efficiently (minimize changes in workforce) • Meet inventory policy(minimize inventory) • Minimize cost(maximize profit) • Labor • Inventory • Plant & equipment • Subcontract • Backorder / stockout costs © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J. 07458

9. Aggregate Planning Options Capacity Options Demand Options • Vary staffing (hire/fire, overtime, idle time, temporary workers) • Subcontracting • Change inventory levels • Vary prices • Vary promotion • Change lead times(e.g., backorders) • Offer complementary products REACTIVE AGGRESIVE © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J. 07458

10. Aggregate Plan Worksheet Aggregate Planning Strategies Chase Strategy Level Strategy Mixed Strategy Production equals demand Production rate is constant © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J. 07458

11. 70 Forecast Level production using Demand 60 average monthly forecast demand 50 40 Production rate per working day 30 20 10 0 Jan Feb Mar Apr May Jun 22 18 21 21 22 20 Graphical Approach © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J. 07458

12. 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 © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J. 07458

13. Yield Management • The aggregate planning process of allocating resources to customers at prices that will maximize yield (revenue) • Used where businesses have: • perishable inventory • service or product can be sold in advance • demand fluctuates • capacity is relatively fixed • demand can be segmented • variable costs are low and fixed costs are high • Examples – airlines, hotels, cruise lines, etc. © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J. 07458

14. Hotel: Single Price Level Sales Demand Curve Potential customers exist who are willing to pay more than the $15 variable cost Passed up profit contributions $ Net Sales = net price * 50 rm. = ($150 - $15) * 50 = $6,750 Some customers who paid $150 for the room were actually willing to pay more Money left on the table Price $15 variable cost of room $150 price charged for room © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J. 07458

15. Hotel: Two Price Levels Sales Demand Net prices: Price #1 = $85 Price #2 = $185 $ Net Sales = $85 * 30 people + $185 * 30 people = $8100 Price $15 variable cost of room $100 Price #1 $200 Price #2 © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J. 07458

16. Making Yield Management Work • Multiple pricing structures must be feasible and appear logical • Manage forecasts of use and duration of use • Manage the changes in demand. © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J. 07458

17. Fixed Price Variable Price Durat ion o f use Predictable use Quadrant 1 Movies, Stadiums / arenas, Convention centers, Hotel meeting space Quadrant 2 Hotels, Airlines, Rental cars, Cruise lines Quadrant 4 Continuing care hospitals Unpredictable use Quadrant 3 Restaurants, Golf courses, ISP’s Yield Management Matrix © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J. 07458

18. Air NZ video Summary • Aggregate planning reconciles conflicting needs and objectives • Aggregate plan specifies time-phased production rates, workforce levels and inventory holdings • Aggregation: • products / services are grouped into families • labor may be grouped along family lines or by skills • time may be aggregated (quarters, etc.) • Two basic planning options: changing capacity and changing demand • Aggregate planning strategies: • Level – constant workforce or production level • Chase – vary production to equal demand © 2004 by Prentice Hall, Inc. Upper Saddle River, N.J. 07458