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Aggregate PlanningAggregate Planning(session 1,2)(session 1,2)
11
OutlineOutlineThe Planning ProcessThe Planning ProcessThe Nature of Aggregate PlanningThe Nature of Aggregate PlanningAggregate Planning StrategiesAggregate Planning Strategies
Capacity OptionsCapacity OptionsDemand OptionsDemand OptionsMixing Options to Develop a PlanMixing Options to Develop a Plan
Methods for Aggregate PlanningMethods for Aggregate PlanningGraphical MethodsGraphical MethodsMathematical ApproachesMathematical ApproachesComparison of Aggregate Planning MethodComparison of Aggregate Planning Method
22
Outline Outline –– ContinuedContinued
Aggregate Planning in ServicesAggregate Planning in ServicesRestaurantsRestaurantsHospitalsHospitalsNational Chains of Small Service National Chains of Small Service FirmsFirmsMiscellaneous ServicesMiscellaneous ServicesAirline IndustryAirline Industry
Yield ManagementYield Management
33
Aggregate PlanningAggregate Planning
Determine the quantity and timing of Determine the quantity and timing of production for the immediate futureproduction for the immediate future
Objective is to minimize cost over the Objective is to minimize cost over the planning period by adjustingplanning period by adjusting
Production ratesProduction ratesLabor levelsLabor levelsInventory levelsInventory levelsOvertime workOvertime workSubcontracting ratesSubcontracting ratesOther controllable variablesOther controllable variables
44
Aggregate PlanningAggregate Planning
Required for aggregate planningRequired for aggregate planning
A logical overall unit for measuring sales A logical overall unit for measuring sales and outputand outputA forecast of demand for an intermediate A forecast of demand for an intermediate planning period in these aggregate termsplanning period in these aggregate termsA method for determining costsA method for determining costsA model that combines forecasts and A model that combines forecasts and costs so that scheduling decisions can costs so that scheduling decisions can be made for the planning periodbe made for the planning period
55
The Planning ProcessThe Planning ProcessLong-range plans (over one year)Research and DevelopmentNew product plansCapital investmentsFacility location/expansion
Intermediate-range plans (3 to 18 months)Sales planningProduction planning and budgetingSetting employment, inventory,
subcontracting levelsAnalyzing operating plans
Short-range plans (up to 3 months)Job assignmentsOrderingJob schedulingDispatchingOvertimePart-time help
Top executives
Operations managers
Operations managers, supervisors, foremen
ResponsibilityResponsibility Planning tasks and horizonPlanning tasks and horizon66
Aggregate PlanningAggregate Planning
77
Quarter 1Quarter 1JanJan FebFeb MarMar
150,000150,000 120,000120,000 110,000110,000
Quarter 2Quarter 2AprApr MayMay JunJun
100,000100,000 130,000130,000 150,000150,000
Quarter 3Quarter 3JulJul AugAug SepSep
180,000180,000 150,000150,000 140,000140,000
Aggregate PlanningAggregate Planning
•• Aggregate planning is a part of larger Aggregate planning is a part of larger production planning system; production planning system; therefore understanding the therefore understanding the interfaces between plan and several interfaces between plan and several internal and external factors is internal and external factors is essential for effective aggregate essential for effective aggregate planning.planning.
88
Aggregate PlanningAggregate Planning
99
Aggregate Planning Aggregate Planning (Required Inputs to the Production (Required Inputs to the Production
Planning System)Planning System)
Currentphysical capacity
Planning for
production
External capacity
Competitors’behavior
Raw material availability
Market demand
Economic conditions
Current workforce
Inventory levels
Activities required for prod.
External to firm
Internal to firm
1010
Few Aggregate Planning Few Aggregate Planning StrategiesStrategies
1.1. Use inventories to absorb changes in Use inventories to absorb changes in demanddemand
2.2. Accommodate changes by varying Accommodate changes by varying workforce sizeworkforce size
3.3. Use partUse part--timers, overtime, or idle time to timers, overtime, or idle time to absorb changesabsorb changes
4.4. Use subcontractors and maintain a stable Use subcontractors and maintain a stable workforceworkforce
5.5. Change prices or other factors to Change prices or other factors to influence demandinfluence demand
1111
Capacity OptionsCapacity Options
1.1. Changing inventory levelsChanging inventory levelsIncrease inventory in low demand Increase inventory in low demand periods to meet high demand in periods to meet high demand in the futurethe futureIncreases costs associated with Increases costs associated with storage, insurance, handling, storage, insurance, handling, obsolescence, and capital obsolescence, and capital investment 15% to 40%investment 15% to 40%Shortages can mean lost sales Shortages can mean lost sales due to long lead times and poor due to long lead times and poor customer servicecustomer service
1212
Capacity OptionsCapacity Options
2. Varying workforce size by hiring or 2. Varying workforce size by hiring or layoffs layoffs
Match production rate to demandMatch production rate to demandTraining and separation costs for Training and separation costs for hiring and laying off workers hiring and laying off workers New workers may have lower New workers may have lower productivityproductivityLaying off workers may lower morale Laying off workers may lower morale and productivityand productivity
1313
Capacity OptionsCapacity Options
3. Varying production rate through 3. Varying production rate through overtime or idle timeovertime or idle time
Allows constant workforceAllows constant workforceMay be difficult to meet large May be difficult to meet large increases in demandincreases in demandOvertime can be costly and may Overtime can be costly and may drive down productivitydrive down productivityAbsorbing idle time may be Absorbing idle time may be difficultdifficult
1414
Capacity OptionsCapacity Options
4. Subcontracting4. SubcontractingTemporary measure during Temporary measure during periods of peak demandperiods of peak demandMay be costlyMay be costlyAssuring quality and timely Assuring quality and timely delivery may be difficultdelivery may be difficultExposes your customers to a Exposes your customers to a possible competitorpossible competitor
1515
Capacity OptionsCapacity Options
5. Using part5. Using part--time workerstime workersUseful for filling unskilled or low Useful for filling unskilled or low skilled positions, especially in skilled positions, especially in servicesservices
1616
Demand OptionsDemand Options
6. Influencing demand6. Influencing demandUse advertising or promotion Use advertising or promotion to increase demand in low to increase demand in low periodsperiodsAttempt to shift Attempt to shift demand to slow demand to slow periodsperiodsMay not be May not be sufficient to sufficient to balance demand balance demand and capacityand capacity
1717
Demand OptionsDemand Options
7. Back ordering during high7. Back ordering during high--demand periodsdemand periods
Requires customers to wait for an Requires customers to wait for an order without loss of goodwill or order without loss of goodwill or the orderthe orderMost effective when there are few Most effective when there are few if any substitutes for the product if any substitutes for the product or serviceor serviceOften results in lost salesOften results in lost sales
1818
Demand OptionsDemand Options
8. Counter seasonal product and 8. Counter seasonal product and service mixingservice mixing
Develop a product mix of Develop a product mix of counterseasonal itemscounterseasonal itemsMay lead to products or services May lead to products or services outside the companyoutside the company’’s areas of s areas of expertiseexpertise
1919
Methods for Aggregate Methods for Aggregate PlanningPlanning
A mixed strategy may be the best A mixed strategy may be the best way to achieve minimum costsway to achieve minimum costsThere are many possible mixed There are many possible mixed strategiesstrategiesFinding the optimal plan is not Finding the optimal plan is not always possiblealways possible
2020
Mixing Options to Mixing Options to Develop an aggregate PlanDevelop an aggregate Plan
Chase strategyChase strategyMatch output rates to demand Match output rates to demand forecast for each periodforecast for each periodVary workforce levels or vary Vary workforce levels or vary production rateproduction rateFavored by many service Favored by many service organizationsorganizations
2121
Mixing Options to Mixing Options to Develop a PlanDevelop a Plan
Level strategyLevel strategyDaily production is uniformDaily production is uniformUse inventory or idle time as bufferUse inventory or idle time as bufferStable production leads to better Stable production leads to better quality and productivityquality and productivity
Some combination of capacity Some combination of capacity options, a mixed strategy, might be options, a mixed strategy, might be the best solutionthe best solution
2222
Graphical MethodsGraphical Methods
Popular techniquesPopular techniques
Easy to understand and useEasy to understand and use
TrialTrial--andand--error approaches that do error approaches that do not guarantee an optimal solutionnot guarantee an optimal solution
Require only limited computationsRequire only limited computations2323
Graphical MethodsGraphical Methods
1.1. Determine the demand for each periodDetermine the demand for each period2.2. Determine the capacity for regular time, Determine the capacity for regular time,
overtime, and subcontracting each periodovertime, and subcontracting each period3.3. Find labor costs, hiring and layoff costs, Find labor costs, hiring and layoff costs,
and inventory holding costsand inventory holding costs4.4. Consider company policy on workers and Consider company policy on workers and
stock levelsstock levels5.5. Develop alternative plans and examine Develop alternative plans and examine
their total coststheir total costs
2424
Example 1Example 1ABC a manufacturer of roofing tiles has ABC a manufacturer of roofing tiles has developed monthly Forecasts for roofing tiles developed monthly Forecasts for roofing tiles and presented the period Januaryand presented the period January--June in the June in the table 1. table 1.
To represent the projected demand, ABC also To represent the projected demand, ABC also draws a graph (figure 1) that charts the daily draws a graph (figure 1) that charts the daily demand each month. The dotted line across the demand each month. The dotted line across the chart represents the production rate required to chart represents the production rate required to meet average demand which is computed by meet average demand which is computed by dividing the total expected demand by number of dividing the total expected demand by number of production days. production days.
2525
Table 1: Expected demand and number of production days.Table 1: Expected demand and number of production days.
MonthMonth Expected DemandExpected DemandProduction Production
DaysDaysDemand Per Day Demand Per Day
(computed)(computed)
JanJan 900900 2222 4141
FebFeb 700700 1818 3939
MarMar 800800 2121 3838
AprApr 1,2001,200 2121 5757
MayMay 1,5001,500 2222 6868
JuneJune 1,1001,100 2020 5555
6,2006,200 124124
2626
Figure 1Figure 1
70 70 –
60 60 –
50 50 –
40 40 –
30 30 –
0 0 –JanJan FebFeb MarMar AprApr MayMay JuneJune == MonthMonth
2222 1818 2121 2121 2222 2020 == Number ofNumber ofworking daysworking days
Prod
uctio
n ra
te p
er w
orki
ng d
ayPr
oduc
tion
rate
per
wor
king
day
Level production using average Level production using average monthly forecast demandmonthly forecast demand
Forecast demandForecast demand
Average Average requirementrequirement ==
Total expected demandTotal expected demandNumber of production daysNumber of production days
= = 50= = 50 units per dayunits per day6,2006,200124124
2727
Possible Strategy 1Possible Strategy 1Constant WorkforceConstant Workforce
Cost InformationCost InformationInventory carrying costInventory carrying cost $ 5$ 5 per unit per monthper unit per month
Subcontracting cost per unitSubcontracting cost per unit $10$10 per unitper unit
Average pay rateAverage pay rate $ 5$ 5 per hour per hour ($40($40 per dayper day))
Overtime pay rateOvertime pay rate $ 7$ 7 per hour per hour ((above above 88 hours per dayhours per day))
LaborLabor--hours to produce a unithours to produce a unit 1.61.6 hours per unithours per unit
Cost of increasing daily production rate Cost of increasing daily production rate (hiring and training)(hiring and training)
$300$300 per unitper unit
Cost of decreasing daily production rate Cost of decreasing daily production rate (layoffs)(layoffs)
$600$600 per unitper unit
Table 2Table 2
2828
Possible Strategy 1Possible Strategy 1
Table 13.3Table 13.3
Cost InformationCost InformationInventory carry costInventory carry cost $ 5$ 5 per unit per monthper unit per month
Subcontracting cost per unitSubcontracting cost per unit $10$10 per unitper unit
Average pay rateAverage pay rate $ 5$ 5 per hour per hour ($40($40 per dayper day))
Overtime pay rateOvertime pay rate $ 7$ 7 per hour per hour ((above above 88 hours per dayhours per day))
LaborLabor--hours to produce a unithours to produce a unit 1.61.6 hours per unithours per unit
Cost of increasing daily production rate Cost of increasing daily production rate (hiring and training)(hiring and training)
$300$300 per unitper unit
Cost of decreasing daily production rate Cost of decreasing daily production rate (layoffs)(layoffs)
$600$600 per unitper unit
Plan 1 Plan 1 –– constant workforceconstant workforce
MonthProduction at
50 Units per DayDemand Forecast
Monthly Inventory Change
Ending Inventory
Jan 1,100 900 +200 200Feb 900 700 +200 400Mar 1,050 800 +250 650Apr 1,050 1,200 -150 500May 1,100 1,500 -400 100June 1,000 1,100 -100 0
1,850
Total units of inventory carried over from onemonth to the next = 1,850 units
Workforce required to produce 50 units per day = 10 workers
2929
Possible Strategy 1Possible Strategy 1
Table 13.3Table 13.3
Cost InformationCost InformationInventory carry costInventory carry cost $ 5$ 5 per unit per monthper unit per month
Subcontracting cost per unitSubcontracting cost per unit $10$10 per unitper unit
Average pay rateAverage pay rate $ 5$ 5 per hour per hour ($40($40 per dayper day))
Overtime pay rateOvertime pay rate $ 7$ 7 per hour per hour ((above above 88 hours per dayhours per day))
LaborLabor--hours to produce a unithours to produce a unit 1.61.6 hours per unithours per unit
Cost of increasing daily production rate Cost of increasing daily production rate (hiring and training)(hiring and training)
$300$300 per unitper unit
Cost of decreasing daily production rate Cost of decreasing daily production rate (layoffs)(layoffs)
$600$600 per unitper unit
MonthProduction at
50 Units per DayDemand Forecast
Monthly Inventory Change
Ending Inventory
Jan 1,100 900 +200 200Feb 900 700 +200 400Mar 1,050 800 +250 650Apr 1,050 1,200 -150 500May 1,100 1,500 -400 100June 1,000 1,100 -100 0
1,850
Total units of inventory carried over from onemonth to the next = 1,850 units
Workforce required to produce 50 units per day = 10 workers
Costs CalculationsInventory carrying $9,250 (= 1,850 units carried x $5
per unit)Regular-time labor 49,600 (= 10 workers x $40 per
day x 124 days)Other costs (overtime,
hiring, layoffs, subcontracting) 0
Total cost $58,850
3030
Possible Strategy 1Possible Strategy 1
Cum
ulat
ive
dem
and
units
Cum
ulat
ive
dem
and
units
7,000 7,000 –
6,000 6,000 –
5,000 5,000 –
4,000 4,000 –
3,000 3,000 –
2,000 –
1,000 –
–JanJan FebFeb MarMar AprApr MayMay JuneJune
Cumulative forecast Cumulative forecast requirementsrequirements
Cumulative level Cumulative level production using production using average monthly average monthly
forecast forecast requirementsrequirements
Reduction Reduction of inventoryof inventory
Excess inventoryExcess inventory
6,200 units6,200 units
Figure 2Figure 23131
Possible Strategy 2Possible Strategy 2SubcontractingSubcontracting
MonthMonth Expected DemandExpected DemandProduction Production
DaysDaysDemand Per Day Demand Per Day
(computed)(computed)JanJan 900900 2222 4141FebFeb 700700 1818 3939MarMar 800800 2121 3838AprApr 1,2001,200 2121 5757MayMay 1,5001,500 2222 6868JuneJune 1,1001,100 2020 5555
6,2006,200 124124
Minimum requirementMinimum requirement = 38= 38 units per dayunits per day
3232
Possible Strategy 2Possible Strategy 2
70 70 –
60 60 –
50 50 –
40 40 –
30 30 –
0 0 –JanJan FebFeb MarMar AprApr MayMay JuneJune == MonthMonth
2222 1818 2121 2121 2222 2020 == Number ofNumber ofworking daysworking days
Prod
uctio
n ra
te p
er w
orki
ng d
ayPr
oduc
tion
rate
per
wor
king
day
Level production Level production using lowest using lowest
monthly forecast monthly forecast demanddemand
Forecast demandForecast demand
3333
Possible Strategy 2Possible Strategy 2
Cost InformationCost InformationInventory carrying costInventory carrying cost $ 5$ 5 per unit per monthper unit per month
Subcontracting cost per unitSubcontracting cost per unit $10$10 per unitper unit
Average pay rateAverage pay rate $ 5$ 5 per hour per hour ($40($40 per dayper day))
Overtime pay rateOvertime pay rate $ 7$ 7 per hour per hour ((above above 88 hours per dayhours per day))
LaborLabor--hours to produce a unithours to produce a unit 1.61.6 hours per unithours per unit
Cost of increasing daily production rate Cost of increasing daily production rate (hiring and training)(hiring and training)
$300$300 per unitper unit
Cost of decreasing daily production rate Cost of decreasing daily production rate (layoffs)(layoffs)
$600$600 per unitper unit
3434
Possible Strategy 2Possible Strategy 2
Cost InformationCost InformationInventory carry costInventory carry cost $ 5$ 5 per unit per monthper unit per month
Subcontracting cost per unitSubcontracting cost per unit $10$10 per unitper unit
Average pay rateAverage pay rate $ 5$ 5 per hour per hour ($40($40 per dayper day))
Overtime pay rateOvertime pay rate $ 7$ 7 per hour per hour ((above above 88 hours per dayhours per day))
LaborLabor--hours to produce a unithours to produce a unit 1.61.6 hours per unithours per unit
Cost of increasing daily production rate Cost of increasing daily production rate (hiring and training)(hiring and training)
$300$300 per unitper unit
Cost of decreasing daily production rate Cost of decreasing daily production rate (layoffs)(layoffs)
$600$600 per unitper unit
In-house production = 38 units per day x 124 days
= 4,712 units
Subcontract units = 6,200 - 4,712= 1,488 units
3535
Possible Strategy 2Possible Strategy 2
Table 13.3Table 13.3
Cost InformationCost InformationInventory carry costInventory carry cost $ 5$ 5 per unit per monthper unit per month
Subcontracting cost per unitSubcontracting cost per unit $10$10 per unitper unit
Average pay rateAverage pay rate $ 5$ 5 per hour per hour ($40($40 per dayper day))
Overtime pay rateOvertime pay rate $ 7$ 7 per hour per hour ((above above 88 hours per dayhours per day))
LaborLabor--hours to produce a unithours to produce a unit 1.61.6 hours per unithours per unit
Cost of increasing daily production rate Cost of increasing daily production rate (hiring and training)(hiring and training)
$300$300 per unitper unit
Cost of decreasing daily production rate Cost of decreasing daily production rate (layoffs)(layoffs)
$600$600 per unitper unit
In-house production = 38 units per day x 124 days
= 4,712 units
Subcontract units = 6,200 - 4,712= 1,488 units
Costs CalculationsRegular-time labor $37,696 (= 7.6 workers x $40 per
day x 124 days)Subcontracting 14,880 (= 1,488 units x $10 per
unit)
Total cost $52,576
3636
Possible Strategy 3Possible Strategy 3Hiring and firingHiring and firing
MonthMonth Expected DemandExpected DemandProduction Production
DaysDaysDemand Per Day Demand Per Day
(computed)(computed)JanJan 900900 2222 4141FebFeb 700700 1818 3939MarMar 800800 2121 3838AprApr 1,2001,200 2121 5757MayMay 1,5001,500 2222 6868JuneJune 1,1001,100 2020 5555
6,2006,200 124124
Production = Expected DemandProduction = Expected Demand
3737
Possible Strategy 3Possible Strategy 3
70 70 –
60 60 –
50 50 –
40 40 –
30 30 –
0 0 –JanJan FebFeb MarMar AprApr MayMay JuneJune == MonthMonth
2222 1818 2121 2121 2222 2020 == Number ofNumber ofworking daysworking days
Prod
uctio
n ra
te p
er w
orki
ng d
ayPr
oduc
tion
rate
per
wor
king
day Forecast demand and Forecast demand and
monthly productionmonthly production
3838
Possible Strategy 3Possible Strategy 3
Cost InformationCost InformationInventory carrying costInventory carrying cost $ 5$ 5 per unit per monthper unit per month
Subcontracting cost per unitSubcontracting cost per unit $10$10 per unitper unit
Average pay rateAverage pay rate $ 5$ 5 per hour per hour ($40($40 per dayper day))
Overtime pay rateOvertime pay rate $ 7$ 7 per hour per hour ((above above 88 hours per dayhours per day))
LaborLabor--hours to produce a unithours to produce a unit 1.61.6 hours per unithours per unit
Cost of increasing daily production rate Cost of increasing daily production rate (hiring and training)(hiring and training)
$300$300 per unitper unit
Cost of decreasing daily production rate Cost of decreasing daily production rate (layoffs)(layoffs)
$600$600 per unitper unit
3939
Possible Strategy 3Possible Strategy 3
Table 13.3Table 13.3
Cost InformationCost InformationInventory carrying costInventory carrying cost $ 5$ 5 per unit per monthper unit per month
Subcontracting cost per unitSubcontracting cost per unit $10$10 per unitper unit
Average pay rateAverage pay rate $ 5$ 5 per hour per hour ($40($40 per dayper day))
Overtime pay rateOvertime pay rate $ 7$ 7 per hour per hour ((above above 88 hours per dayhours per day))
LaborLabor--hours to produce a unithours to produce a unit 1.61.6 hours per unithours per unit
Cost of increasing daily production rate Cost of increasing daily production rate (hiring and training)(hiring and training)
$300$300 per unitper unit
Cost of decreasing daily production rate Cost of decreasing daily production rate (layoffs)(layoffs)
$600$600 per unitper unit
MonthForecast
(units)
Daily Prod Rate
Basic Production
Cost (demand x
1.6 hrs/unit x $5/hr)
Extra Cost of Increasing Production (hiring cost)
Extra Cost of Decreasing Production (layoff cost) Total Cost
Jan 900 41 $ 7,200 — — $ 7,200
Feb 700 39 5,600 — $1,200 (= 2 x $600) 6,800
Mar 800 38 6,400 — $600 (= 1 x $600) 7,000
Apr 1,200 57 9,600 $5,700 (= 19 x $300) — 15,300
May 1,500 68 12,000 $3,300 (= 11 x $300) — 15,300
June 1,100 55 8,800 — $7,800 (= 13 x $600) 16,600
$49,600 $9,000 $9,600 $68,200
4040
Comparison of Three StrategiesComparison of Three Strategies
CostCost Plan 1Plan 1 Plan 2Plan 2 Plan 3Plan 3
Inventory carryingInventory carrying $ 9,250$ 9,250 $ 0$ 0 $ 0$ 0
Regular laborRegular labor 49,60049,600 37,69637,696 49,60049,600
Overtime laborOvertime labor 00 00 00
HiringHiring 00 00 9,0009,000
LayoffsLayoffs 00 00 9,6009,600
SubcontractingSubcontracting 00 14,88014,880 00
Total costTotal cost $58,850$58,850 $52,576$52,576 $68,200$68,200
Plan 2 is the lowest cost optionPlan 2 is the lowest cost option4141
Materials $5/unitHolding costs $1/unit per mo.Marginal cost of stockout $1.25/unit per mo.Hiring and training cost $200/workerLayoff costs $250/workerLabor hours required .15 hrs/unitStraight time labor cost $8/hourBeginning inventory 250 unitsProductive hours/worker/day 7.25Paid straight hrs/day 8
Suppose we have the following unit demand and cost information:Suppose we have the following unit demand and cost information:
Demand/mo Jan Feb Mar Apr May Jun
4500 5500 7000 10000 8000 6000
Example 2:Unit Demand & Cost DataExample 2:Unit Demand & Cost Data
4242
Jan Feb Mar Apr May JunDays/mo 22 19 21 21 22 20Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145Units/worker 1063.33 918.33 1015 1015 1063.33 966.67$/worker $1,408 1,216 1,344 1,344 1,408 1,280
Productive hours/worker/day 7.25Paid straight hrs/day 8
Demand/mo Jan Feb Mar Apr MayJun
4500 5500 7000 10000 80006000
Given the demand and cost information below, whatare the aggregate hours/worker/month, units/worker, and dollars/worker?
Given the demand and cost information below, whatare the aggregate hours/worker/month, units/worker, and dollars/worker?
7.25x22
7.25/0.15=48.33 & 48.33x22=1063.3322x8hrsx$8=$140
8
CutCut--andand--Try Example: Determining Try Example: Determining Straight Labor Costs and OutputStraight Labor Costs and Output
4343
Mixing Option: Chase StrategyMixing Option: Chase Strategy
JanDays/mo 22Hrs/worker/mo 159.5Units/worker 1,063.33$/worker $1,408
JanDemand 4,500Beg. inv. 250Net req. 4,250Req. workers 3.997HiredFired 3Workforce 4Ending inventory 0
Lets assume our current workforce is 7 workers.
Lets assume our current workforce is 7 workers.
First, calculate net requirements for production, or 4500-250=4250 units
Then, calculate number of workers needed to produce the net requirements, or 4250/1063.33=3.997 or 4 workers
Finally, determine the number of workers to hire/fire. In this case we only need 4 workers, we have 7, so 3 can be fired.
4444
Below are the complete calculations for the remaining months in the six month planning horizonBelow are the complete calculations for the remaining months in the six month planning horizon
Jan Feb Mar Apr May JunDays/mo 22 19 21 21 22 20Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145Units/worker 1,063 918 1,015 1,015 1,063 967$/worker $1,408 1,216 1,344 1,344 1,408 1,280
Jan Feb Mar Apr May JunDemand 4,500 5,500 7,000 10,000 8,000 6,000Beg. inv. 250Net req. 4,250 5,500 7,000 10,000 8,000 6,000Req. workers 3.997 5.989 6.897 9.852 7.524 6.207Hired 2 1 3Fired 3 2 1Workforce 4 6 7 10 8 7Ending inventory 0 0 0 0 0 0
4545
Jan Feb Mar Apr May JunDemand 4,500 5,500 7,000 10,000 8,000 6,000Beg. inv. 250Net req. 4,250 5,500 7,000 10,000 8,000 6,000Req. workers 3.997 5.989 6.897 9.852 7.524 6.207Hired 2 1 3Fired 3 2 1Workforce 4 6 7 10 8 7Ending inventory 0 0 0 0 0 0
Jan Feb Mar Apr May Jun CostsMaterial $21,250.00 $27,500.00 $35,000.00 $50,000.00 $40,000.00 $30,000.00 203,750.00Labor 5,627.59 7,282.76 9,268.97 13,241.38 10,593.10 7,944.83 53,958.62Hiring cost 400.00 200.00 600.00 1,200.00Firing cost 750.00 500.00 250.00 1,500.00
$260,408.62
Below are the complete calculations for the remaining months in the six month planning horizon with the other costs included
4646
Mixing Option: Level StrategyMixing Option: Level StrategySurplus and Storage allowedSurplus and Storage allowed
JanDemand 4,500Beg. inv. 250Net req. 4,250Workers 6Production 6,380Ending inventory 2,130Surplus 2,130Shortage
Lets take the same problem as before but this time use the Level Workforce strategy
Lets take the same problem as before but this time use the Level Workforce strategy
This time we will seek to use a workforce level of 6 workersThis time we will seek to use a workforce level of 6 workers
4747
Below are the complete calculations for the remaining months in the six month planning horizonBelow are the complete calculations for the remaining months in the six month planning horizon
Jan Feb Mar Apr May JunDemand 4,500 5,500 7,000 10,000 8,000 6,000Beg. inv. 250 2,130 2,140 1,230 -2,680 -1,300Net req. 4,250 3,370 4,860 8,770 10,680 7,300Workers 6 6 6 6 6 6Production 6,380 5,510 6,090 6,090 6,380 5,800Ending inventory 2,130 2,140 1,230 -2,680 -1,300 -1,500Surplus 2,130 2,140 1,230Shortage 2,680 1,300 1,500
Note, if we recalculate this sheet with 7 workers we would have a surplusNote, if we recalculate this sheet with 7 workers we would have a surplus
4848
Below are the complete calculations for the remaining months in the six month planning horizon with the other costs included
Below are the complete calculations for the remaining months in the six month planning horizon with the other costs included
Jan Feb Mar Apr May Jun4,500 5,500 7,000 10,000 8,000 6,000
250 2,130 10 -910 -3,910 -1,6204,250 3,370 4,860 8,770 10,680 7,300
6 6 6 6 6 66,380 5,510 6,090 6,090 6,380 5,8002,130 2,140 1,230 -2,680 -1,300 -1,5002,130 2,140 1,230
2,680 1,300 1,500
Jan Feb Mar Apr May Jun$8,448 $7,296 $8,064 $8,064 $8,448 $7,680 $48,000.0031,900 27,550 30,450 30,450 31,900 29,000 181,250.002,130 2,140 1,230 5,500.00
3,350 1,625 1,875 6,850.00
$241,600.00
Note, total costs under this strategy are less than Chase at $260.408.62
Note, total costs under this strategy are less than Chase at $260.408.62
LaborMaterialStorageStockout
4949
Mathematical ApproachesMathematical Approaches
Useful for generating strategiesUseful for generating strategiesTransportation Method of Linear Transportation Method of Linear ProgrammingProgramming
Produces an optimal planProduces an optimal plan
Management Coefficients ModelManagement Coefficients ModelModel built around managerModel built around manager’’s s experience and performanceexperience and performance
Other ModelsOther ModelsLinear Decision RuleLinear Decision RuleSimulationSimulation
5050
Transportation MethodTransportation MethodSales PeriodSales Period
MarMar AprApr MayMayDemandDemand 800800 1,0001,000 750750Capacity:Capacity:RegularRegular 700700 700700 700700OvertimeOvertime 5050 5050 5050SubcontractingSubcontracting 150150 150150 130130
Beginning inventoryBeginning inventory 100100 tirestires
CostsCostsRegular timeRegular time $40$40 per tireper tireOvertimeOvertime $50$50 per tireper tireSubcontractingSubcontracting $70$70 per tireper tireCarryingCarrying $ 2$ 2 per tire per monthper tire per month
5151
Transportation ExampleTransportation Example
Important pointsImportant points1.1. Carrying costs are Carrying costs are $2$2/tire/month. If /tire/month. If
goods are made in one period and held goods are made in one period and held over to the next, holding costs are over to the next, holding costs are incurredincurred
2.2. Supply must equal demand, so a Supply must equal demand, so a dummy column called dummy column called ““unused unused capacitycapacity”” is addedis added
3.3. Because back ordering is not viable in Because back ordering is not viable in this example, cells that might be used to this example, cells that might be used to satisfy earlier demand are not availablesatisfy earlier demand are not available
5252
Transportation ExampleTransportation Example
Important pointsImportant points4.4. Quantities in each column designate the Quantities in each column designate the
levels of inventory needed to meet levels of inventory needed to meet demand requirementsdemand requirements
5.5. In general, production should be In general, production should be allocated to the lowest cost cell allocated to the lowest cost cell available without exceeding unused available without exceeding unused capacity in the row or demand in the capacity in the row or demand in the columncolumn
5353
Transportation ExampleTransportation Example
5454
Management Coefficients Management Coefficients ModelModel
Builds a model based on managerBuilds a model based on manager’’s s experience and performanceexperience and performanceA regression model is constructed A regression model is constructed to define the relationships between to define the relationships between decision variablesdecision variablesObjective is to remove Objective is to remove inconsistencies in decision makinginconsistencies in decision making
5555
Other ModelsOther Models
Linear Decision RuleLinear Decision Rule
Minimizes costs using quadratic cost curvesMinimizes costs using quadratic cost curvesOperates over a particular time periodOperates over a particular time period
SimulationSimulation
Uses a search procedure to try different Uses a search procedure to try different combinations of variablescombinations of variablesDevelops feasible but not necessarily optimal Develops feasible but not necessarily optimal solutionssolutions
5656
Summary of Aggregate Summary of Aggregate Planning MethodsPlanning Methods
TechniquesTechniquesSolution Solution
ApproachesApproaches Important AspectsImportant Aspects
GraphicalGraphicalmethodsmethods
Trial and Trial and errorerror
Simple to understand and Simple to understand and easy to use. Many easy to use. Many solutions; one chosen solutions; one chosen may not be optimal.may not be optimal.
Transportation Transportation method of linear method of linear programmingprogramming
OptimizationOptimization LP software available; LP software available; permits sensitivity permits sensitivity analysis and new analysis and new constraints; linear constraints; linear functions may not be functions may not be realistic.realistic.
5757
Summary of Aggregate Summary of Aggregate Planning MethodsPlanning Methods
TechniquesTechniquesSolution Solution
ApproachesApproaches Important AspectsImportant Aspects
Management Management coefficients coefficients modelmodel
HeuristicHeuristic Simple, easy to implement; Simple, easy to implement; tries to mimic managertries to mimic manager’’s s decision process; uses decision process; uses regression.regression.
SimulationSimulation Change Change parametersparameters
Complex; may be difficult Complex; may be difficult to build and for managers to build and for managers to understand.to understand.
5858
Aggregate Planning in ServicesAggregate Planning in Services
Controlling the cost of labor is criticalControlling the cost of labor is critical
1.1. Accurate scheduling of laborAccurate scheduling of labor--hours to hours to assure quick response to customer assure quick response to customer demanddemand
2.2. An onAn on--call labor resource to cover call labor resource to cover unexpected demandunexpected demand
3.3. Flexibility of individual worker skillsFlexibility of individual worker skills4.4. Flexibility in rate of output or hours of Flexibility in rate of output or hours of
workwork
5959
Few Service ScenariosFew Service Scenarios
RestaurantsRestaurantsSmoothing the production Smoothing the production processprocessDetermining the optimal Determining the optimal workforce sizeworkforce size
HospitalsHospitalsResponding to patient demandResponding to patient demand
6060
Few Service ScenariosFew Service Scenarios
National Chains of Small Service National Chains of Small Service FirmsFirms
Planning done at national level Planning done at national level and at local leveland at local level
Miscellaneous ServicesMiscellaneous ServicesPlan human resource Plan human resource requirementsrequirementsManage demandManage demand
6161
Few Service ScenariosFew Service Scenarios
Airline industryAirline industryExtremely complex planning Extremely complex planning problemproblemInvolves number of flights, Involves number of flights, number of passengers, air and number of passengers, air and ground personnel, allocation of ground personnel, allocation of seats to fare classesseats to fare classesResources spread through the Resources spread through the entire systementire system
6262
Yield ManagementYield Management
Allocating resources to customers at Allocating resources to customers at prices that will maximize yield or prices that will maximize yield or revenuerevenue
1.1. Service or product can be sold in Service or product can be sold in advance of consumptionadvance of consumption
2.2. Demand fluctuatesDemand fluctuates3.3. Capacity is relatively fixedCapacity is relatively fixed4.4. Demand can be segmentedDemand can be segmented5.5. Variable costs are low and fixed costs Variable costs are low and fixed costs
are highare high6363
Yield Management: An ExampleYield Management: An Example
Demand Demand CurveCurve
Passed-up contribution
Money left on the table
Potential customers exist who Potential customers exist who are willing to pay more than the are willing to pay more than the $15$15 variable cost of the roomvariable cost of the room
Some customers who paid Some customers who paid $150$150 were actually willing were actually willing to pay more for the roomto pay more for the roomTotalTotal
$ $ contributioncontribution== ((PricePrice)) x x (50(50
roomsrooms))== ($150 ($150 -- $15)$15)
x x (50)(50)== $6,750$6,750
PricePrice
Room salesRoom sales
100100
5050
$150$150Price charged Price charged
for roomfor room
$15$15Variable costVariable cost
of roomof room 6464
Yield Management: An ExampleYield Management: An Example
Total $ contribution =Total $ contribution =(1(1st pricest price) x 30 ) x 30 roomsrooms + (2+ (2ndnd price) x 30 rooms =price) x 30 rooms =
($100 ($100 -- $15) x 30 + ($200 $15) x 30 + ($200 -- $15) x 30 =$15) x 30 =$2,550 + $5,550 = $8,100$2,550 + $5,550 = $8,100
Demand Demand CurveCurve
PricePrice
Room salesRoom sales
100100
6060
3030
$100$100Price 1Price 1
for roomfor room
$200$200Price 2Price 2
for roomfor room
$15$15Variable costVariable cost
of roomof room 6565
Yield Management MatrixYield Management Matrix
Dur
atio
n of
use
Unp
redi
ctab
lePr
edic
tabl
ePrice
Tend to be fixed Tend to be variable
Quadrant 1: Quadrant 2:
Movies HotelsStadiums/arenas Airlines
Convention centers Rental carsHotel meeting space Cruise lines
Quadrant 3: Quadrant 4:
Restaurants Continuing careGolf courses hospitals
Internet serviceproviders
6666
Making Yield Management WorkMaking Yield Management Work
1.1. Multiple pricing structures must Multiple pricing structures must be feasible and appear logical to be feasible and appear logical to the customer.the customer.
2.2. Forecasts of the use and duration Forecasts of the use and duration of use.of use.
3.3. Changes in demandChanges in demand
6767