Chapter 14. 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 14. 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. 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

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

6. Basics – an example Excel time…

7. 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:

8. 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!