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Operations ManagementChapter 13 – Aggregate Planning
PowerPoint presentation to accompany Heizer/Render Principles of Operations Management, 7eOperations Management, 9e
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Aggregate Planning
Objective is to minimize cost over the planning period by adjusting Production rates Labor levels Inventory levels Overtime work Subcontracting rates
Determine the quantity and timing of production for the immediate future
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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
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Aggregate Planning
Quarter 1Jan Feb Mar
150,000 120,000 110,000
Quarter 2Apr May Jun
100,000 130,000 150,000
Quarter 3Jul Aug Sep
180,000 150,000 140,000
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Aggregate Planning
Part of a larger production planning system
Disaggregation breaks the plan down into greater detail
Disaggregation results in a master production schedule
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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
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Demand Options Back ordering during high-
demand periodsRequires 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
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Demand Options Counterseasonal product and
service mixingDevelop a product mix of
counterseasonal itemsMay lead to products or services
outside the company’s areas of expertise
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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
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Capacity Options Varying workforce size by hiring
or layoffsMatch production rate to demandTraining and separation costs for
hiring and laying off workers New workers may have lower
productivityLaying off workers may lower
morale and productivity
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Capacity Options Varying production rate through
overtime or idle timeAllows constant workforceMay be difficult to meet large
increases in demandOvertime can be costly and may
drive down productivityAbsorbing idle time may be
difficult
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Capacity Options Subcontracting
Temporary measure during periods of peak demand
May be costlyAssuring quality and timely
delivery may be difficultExposes your customers to a
possible competitor
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Capacity Options Using part-time workers
Useful for filling unskilled or low skilled positions, especially in services
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Develop a Plan: Strategies
Chase strategyMatch output rates to demand
forecast for each periodVary workforce levels or vary
production rateFavored by many service
organizations
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Develop a Plan: Strategies
Level strategyDaily production is uniformUse inventory or idle time as bufferStable production leads to better
quality and productivity
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Develop a Plan: Strategies
Mixed strategyKeep daily production uniformDon’t build inventoryUse overtime and subcontracting to
meet demand fluctuations
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Aggregate Planning Options
Table 13.1
Option Advantages Disadvantages Some CommentsChase strategy
Avoids inventory costs
Hiring, layoff, and training costs may be significant.
Used where size of labor pool is large.
Level strategy
Changes in human resources are gradual or none; no abrupt production changes.
Inventory holding cost may increase. Shortages may result in lost sales.
Applies mainly to production, not service, operations.
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Aggregate Planning Options
Table 13.1
Option Advantages Disadvantages Some CommentsVarying production rates through overtime or idle time
Matches seasonal fluctuations without hiring/ training costs.
Overtime premiums; tired workers; may not meet demand.
Allows flexibility within the aggregate plan.
Sub-contracting
Permits flexibility and smoothing of the firm’s output.
Loss of quality control; reduced profits; loss of future business.
Applies mainly in production settings.
Mixed strategy options
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Cost of a plan
Cost summaryLabor cost Regular wages
OT wages Only for mixed strategySC cost Only for mixed strategy
Hiring/firing Hiring cost Based on worker hired/fired or change in production rateFiring cost
Inventory Carrying costTotal cost
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Example Given data
Cost dataWage/hour $15.00OT pay rate/hour $18.75Subcontracting rate/unit $35.00Carrying cost $10.00Hiring cost/unit $200.00Firing cost/unit $400.00
Other dataLabor-hours/unit 1.6Hours/day 8OT Limit 25%
Initial conditionWorkers on roll 8Current inventory 25Safety stock 20
Demand forecastMonth Demand DaysJan 900 22Feb 700 18Mar 800 21Apr 1200 21May 1500 22June 1100 20
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Example Given dataCost dataWage/hour $15.00OT pay rate $18.75Subcontracting rate/unit $35.00Carrying cost $10.00Hiring cost/unit $200.00Firing cost/unit $400.00
Other dataLabor-hours/unit 1.6Hours/day 8OT Limit 25%
Initial conditionWorkers on roll 8Current production rate 40Current inventory 25Safety stock 20
Demand forecastMonth Demand DaysJan 900 22Feb 700 18Mar 800 21Apr 1200 21May 1500 22June 1100 20
Compute from input data:
Production rate/worker/day:
Wage rate per day per worker:= 8 hours x $15/hour = $120
56.1
8unitper hours-Labor
dayper Hours
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Example : Chase Plan
Month Demand Production
Jan 900 895Feb 700 700Mar 800 800Apr 1200 1200May 1500 1500June 1100 1100
Production for Jan = Demand – (Initial inventory – Safety stock) i.e. for Jan: 900 – (25 – 20) = 895
Production for all other months = Demand
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Example : Chase Plan
Month Demand Production
Jan 900 895Feb 700 700Mar 800 800Apr 1200 1200May 1500 1500June 1100 1100
DaysProduction
rate40
22 4118 3921 3821 5722 6820 55
Workers = Production rate/Rate per workere.g. for Jan: 41/5 = 8.2 rounded up to 9
Workers
988
121411
Wages
$23,760$17,280$20,160$30,240$36,960$26,400
$154,800
Wages = Worker x Days x Wage per daye.g. for Jan: 9 workers x 22 days x $120/day = $23,760
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Example : Chase Plan
Month Demand Production
Jan 900 895Feb 700 700Mar 800 800Apr 1200 1200May 1500 1500June 1100 1100
DaysProduction
rate40
22 4118 3921 3821 5722 6820 55
Production rate = Production/Dayse.g. for Jan: 895/22 = 40.7 or 41
“Hire” “Fire”
1 00 20 1
19 011 00 13
31 16
Hiring cost = 31 x 200 = $6,200Firing cost = 16 x 400 = $6,400
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Cost of Chase plan
Cost summaryLabor cost Regular wages $154,800
OT wagesSC cost
Hiring/firing Hiring cost $6,200Firing cost $6,400
Inventory Carrying cost $1,200Total cost $168,600
Carrying cost = 20 units safety stock x 6 months x $10 = $1,200
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Example : Level Plan
Net demand rate = (Total demand-(Initial inv. – Safety stock))/Total daysi.e. = (6200 – (25 – 20))/124 = 49.96 or 50 = Production rate per day
Month Demand Days Jan 900 22Feb 700 18Mar 800 21Apr 1200 21May 1500 22June 1100 20
6200 124
Production each month = Production rate x No. of dayse.g. for Jan: 50 x 22 days = 1100
Production
1100900
1050105011001000
E.I.25
225425675525125
252000
E.I = Ending inventory = Previous E.I. + Production - Demande.g. for Jan: 25 + 1100 – 900 = 225
Inventory carrying cost = Total E.I. x Carrying cost
i.e. = 2000 x $10 = $20,000
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Cost of Level planCost summaryLabor cost Regular wages $148,800
OT wagesSC cost
No. of workers = Production rate/Rate per worker = 50/5 = 10Wages = 10 workers x 124 days x $120/day = $148,800
Hiring/firing Hiring cost $2,000Firing cost
Inventory Carrying cost $20,000Total cost $170,800
Hiring cost = (New production rate – old rate) x $200 i.e. = (50 – 40) x 200 = $2,000
Firing cost = 0
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Cost of the two plans
Cost summary Chase LevelLabor cost Regular wages $154,800 $148,800
OT wagesSC cost
Hiring/firing Hiring cost $6,200 $2,000Firing cost $6,400 $0
Inventory Carrying cost $1,200 $20,000Total cost $168,600 $170,800
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Example : Mixed PlanPlan description● Use 10 workers,
i.e., production capacity = 5 x 10 = 50 units/day● Produce what is demanded● If capacity is insufficient use overtime first and then sub-
contracting as needed● Do not accumulate inventory,
i.e. E.I. = Safety stock for all months
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Example : Mixed Plan
Month Req. Days
Jan 895 22Feb 700 18Mar 800 21Apr 1200 21May 1500 22June 1100 20
Production rate capacity = 50 /day
Capacity
1100900
1050105011001000
Capacity = Rate x days, e.g. for Jan: 50 x 22 = 1100
Production
895700800
105011001000
Production = Min{Demand,Capacity}, e.g. for Jan: Min{895,1100} = 895
Shortage
000
150400100
Shortage = Req. – Production, e.g. for Apr. = 1200 – 1050 = 150
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Example : Mixed Plan
Month Req. Days
Jan 895 22Feb 700 18Mar 800 21Apr 1200 21May 1500 22June 1100 20
Production rate capacity = 50 /day
Capacity
1100900
1050105011001000
O.T. Capacity = Capacity x OT Limit %, e.g. for Apr. = 1050 x 25% = 262.5 round
down
Production
895700800
105011001000
Shortage
000
150400100
O.T. production = Min{Shortage, OT Capacity)e.g. for Apr. = Min{150, 262} = 150
OT Capacity
275225262262275250
OT
000
150275100525
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Example : Mixed Plan
Month Req. Days
Jan 895 22Feb 700 18Mar 800 21Apr 1200 21May 1500 22June 1100 20
Production rate capacity = 50 /day
Capacity
1100900
1050105011001000
Subcontracting = Shortage – O.T. productione.g. for May = 400 – 275 = 125
Production
895700800
105011001000
Shortage
000
150400100
OT Capacity
275225262262275250
OT
000
150275100525
SC
0000
1250
125
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Cost of Mixed planCost summaryLabor cost Regular wages $148,800
OT wages $15,750SC cost $4,375
Wages = 10 workers x 124 days x $120/day = $148,800 OT Wages = OT production 525 x 1.6 hours/unit x $18.75/hour = $15,750SC cost = SC quantity 125 x $35 per unit = $4,375
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Cost of Mixed planCost summaryLabor cost Regular wages $148,800
OT wages $15,750SC cost $4,375
Hiring/firing Hiring cost $2,000Firing cost
Hiring cost = (New production rate – old rate) x $200 i.e. = (50 – 40) x 200 = $2,000
Firing cost = 0
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Cost of Mixed planCost summaryLabor cost Regular wages $148,800
OT wages $15,750SC cost $4,375
Hiring/firing Hiring cost $2,000Firing cost
Inventory Carrying cost $1,200Total cost $172,125
Carrying cost = 20 units safety stock x 6 months x $10 = $1,200
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Cost of the three plans
Cost summary Chase Level MixedLabor cost Regular wages $154,800 $148,800 $148,800
OT wages $15,750SC cost $4,375
Hiring/firing Hiring cost $6,200 $2,000 $2,000Firing cost $6,400 $0 $0
Inventory Carrying cost $1,200 $20,000 $1,200Total cost $168,600 $170,800 $172,125
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Transportation Method
Skip
Use Excel Solver
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Solver Method
E F G H I J K L74 Month Begin Hire Fire Rate Days Production Workers75 Jan 40 40 22 880 876 Feb 40 40 18 720 877 Mar 40 40 21 840 878 Apr 40 40 21 840 879 May 40 40 22 880 880 June 40 40 20 800 881 Sum = 0 0
Production rate table
Cell F75 = GivenCell range: G75:H80 = Solver changing cellsColumn I = New production rate, Cell I75 = F75 + G75 – H75Column K = Production, Cell K75 = I75*J75Column L = No. of workers, Cell L75 = I75/Rate per worker cellCell F76 = I75
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Solver MethodInventory table
Cell F85 = GivenCell range: G85:G90 = K75:K80Cell range: H85:I90 = Solver changing cellsColumn K = Ending inventory, Cell K85 = SUM(F85:I85) – J85Column L = O.T. Limit = RT * OT Limit %, Cell L85 = G85 x $B$16Cell F86 = K85
E F G H I J K L84 Month BI RT OT SC Demand EI OT Limit85 Jan 25 880 900 5 22086 Feb 5 720 700 25 18087 Mar 25 840 800 65 21088 Apr 65 840 1200 -295 21089 May -295 880 1500 -915 22090 June -915 800 1100 -1215 20091 Sum = 0 0 -2330
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Solver MethodCost summary
Cell I95 = SUMPRODUCT(L75:L80,J75:J80)*B35 (B35 = wage rate/day)Cell I96 = H91*B7*B14 (B7 = OT pay rate, B14 = Hours/unit)Cell I97 = I91*B8 (B8 = SC cost/unit)Cell I98 = G81*B10 (B10 = Hiring cost/unit)Cell I99 = H81*B11 (B11 = Firing cost/unit)Cell I100 = K91*B9 (B9 = Inventory carrying cost/unit/month)
H I95 Regular wages $119,04096 OT wages $097 SC cost $098 Hiring cost $099 Firing cost $0100 Carrying cost -$23,300101 Total cost $95,740
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Solver MethodSolver Parameters
Set Target cell = Total costChanging cells = Hire & Fire and OT & SCConstraints
OT Production <= OT Limit ($H$85:$H$90 <= $L$85:$L$90)E.I. >= Safety stock ($K$85:$K$90 >= $B$31)OT and SC must be integer ($H$85:$I$90 = Int)
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Solver SolutionInventory tableMonth Begin Hire Fire Rate Days
Production Workers
Jan 40 0 0 40 22 880 8.00Feb 40 0 0 40 18 720 8.00Mar 40 0 0 40 21 840 8.00Apr 40 14 0 54 21 1140 10.86May 54 1 0 55 22 1210 11.00June 55 0 0 55 20 1100 11.00
15 0
Month BI RT OT SC Demand EI OT LimitJan 25 880 15 0 900 20 220Feb 20 720 0 0 700 40 180Mar 40 840 0 0 800 80 210Apr 80 1140 0 0 1200 20 285May 20 1210 290 0 1500 20 302.5June 20 1100 0 0 1100 20 275
305 0 200
Cost summary Regular wages $141,360OT wages $9,150SC cost $0Hiring cost $3,000Firing cost $0Carrying cost $2,000Total cost $155,510
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Cost of the all four plans
Cost summary Chase Level Mixed SolverLabor cost Regular wages $154,800 $148,800 $148,800 $141,360
OT wages $12,600 $9,150SC cost $4,375 $0
Hiring/firing Hiring cost $6,200 $2,000 $2,000 $3,000Firing cost $6,400 $0 $0 $0
Inventory Carrying cost $1,200 $20,000 $1,200 $2,000Total cost $168,600 $170,800 $168,975 $155,510