Chapter 16. Aggregate Sales & Operations Planning

1. Process Planning Long-range Strategic Capacity Planning Intermediate-range Aggregate Sales & Ops. Plan. Manufacturing Master Production Scheduling Services Weekly Workforce & Customer Scheduling Material Requirements Planning Short-range Order Scheduling Daily Workforce & Customer Scheduling Chapter 16. Aggregate Sales & Operations Planning • Medium (intermediate) range operations planning • To meet the demand at a reasonable cost (to balance demand and supply) • To effectively allocate firm’s resources (“optimize”)

2. The Aggregate Operations Plan • Product group or broad category, hence the term Aggregate (Aggregation) • Main purpose: Specify the optimal combination of • production rate (units completed per unit of time) • workforce level (number of workers) • inventory on hand (inventory carried from previous period) • This planning is done over an intermediate-range planning period of 3 to 18 months, the most common planning horizon is 12 months • The plan needs to be updated at least quarterly or monthly • Demand forecast is the key input. • The most critical input to (any) planning process.

3. Potentially Conflicting Objectives in Aggregate Planning • Minimize Costs or Maximize Profits • Maximize customer service • Minimize inventory • Minimize changes in production rate • Minimize changes in the staffing levels • Maximize plant utilization

4. 16-4 Competitors’behavior Raw material availability Market demand External capacity Economic conditions Current physical capacity Current workforce Inventory levels Activities required for production Required Inputs to the Production Planning System External to firm Planning for production Internal to firm

5. Key Strategies for meeting demand • Chase – match the production rate to the order rate by hiring/firing as the order rate varies • Stable workforce – variable work hours. Vary output by over/under time, flexible schedules • Level - stable workforce working at a constant rate; use inventory/shortages/backordering to meet the demand • Mix strategy – two or more of the above in a more complex approach • Outsourcing (subcontracting) can also be used to manage demand fluctuations

6. Relevant Costs Generally the following are the most common relevant costs: • Production costs • Costs associated with changing production rates • Inventory holding costs • Backordering costs

7. Basics – an example Excel time…

8. Developing an Aggregate Plan • Aggregate plans are done at an overview level and are not intended to incorporate all aspects of daily operational details. • The period-to-period sales, inventory-production relationships must balance. • Simple balance equation: • Supply = Demand • It-1 + Pt = Dt + It • This says that total product available in period t is either sold or put into ending inventory. • More realistic balance equation could include backorders and subcontracting (if applicable). • Various production, overtime, subcontracting limitations must be acknowledged. • Consider the following mini-case study:

9. A “simple” aggregate plan • Given the demand and relevant costs develop the lowest cost production plan. • Demand per month, January through December: • 988, 800, 725, 538, 675, 775, 913, 1075, 913, 788, 713, 850 • The variable production cost is estimated to be $10/unit. • The production change cost (increase or decrease from month to month) is $2 per unit. • This cost captures (estimates) the hiring and layoff costs. • The backorder cost is $5 per unit per month and the inventory cost is $1 per unit per month (use ending inventories for costing). • The maximum production capacity is 1000 units per month. • There is no subcontracting option. • At the end of period 12 (December) there should not be any inventory or backorders. • 12 month total production must equal to the 12 month total demand. Hence, supply = demand, but can we do it at minimum cost! • Excel time!