Reid & Sanders, Operations Management © Wiley 2002 Aggregate Planning 13 C H A P T E R.

Reid & Sanders, Operations Management© Wiley 2002

Aggregate Planning 13C H A P T E R


Learning Objectives

• Explain business, sales & operations planning

• Identify different aggregate planning strategies

• Identify options for changing demand & capacity

• Develop aggregate plans & calculate costs

• Evaluate the impact of aggregate plans on functional areas

• Describe the differences between plans for services & manufacturing companies


Business Planning Hierarchy


Sales and Operations Planning

• Medium-term functional plans designed to operationalize the long-term strategic plan:– Marketing plan: defines the target customers– Aggregate production plan: identifies the desired

inventory levels & staffing– Financial plan: identifies the source of funds, cash

flows, & sets budgets – Engineering plan: explores needed product &

process changes


Aggregate Planning

• Based on composite (representative) products:– Simplifies calculations– Forecasts for grouped items are more

accurate

• Considers trade-offs between holding inventory & short-term capacity based on workforce


Master Production Schedule

• Breaks apart the composite product used in Aggregate Planning: – Identifies specific product configurations,

quantities & dates – Used by marketing to determine units

available to promise to customers


Planning Approaches

• Reactive approach:– Allow volume forecasts based on

Marketing plan to drive production planning

• Proactive approach:– Coordinate Marketing & Production plans

to level demand using advertising & price incentives


Aggregate Plan Strategies

• Level plans:– Use a constant workforce & produce

similar quantities each time period.– Use inventories & backorders to absorb

demand peaks & valleys

• Chase plans:– Minimize finished good inventories by

trying to keep pace with demand fluctuations


Hybrid Strategies

• Use a combination of options:– Build-up inventory ahead of rising demand

& use backorders to level extreme peaks– Layoff or furlough workers during lulls– Subcontract production or hire temporary

workers to cover short-term peaks– Reassign workers to preventive

maintenance during lulls


Demand-based Options

• Finished goods inventories:– Anticipate demand

• Back orders & lost sales:– Delay delivery or allow demand to go

unfilled

• Shift demand to off-peak times:– Proactive marketing


Capacity-based Options

• Overtime: Short-term option – Pay workers a premium to work longer hours

• Undertime: Short-term option – Slow the production rate or send workers home

early (lowers labor productivity, but doesn’t tie up capital in finished good inventories)

• Subcontracting: Medium-term option• Hire & fire workers: Long-term option

– Change the size of the workforce


Preliminary Considerations

• Identify the point of departure:– How much capacity is currently in use?

• Identify the magnitude of change needed

• Identify the anticipated duration the modified capacity is necessary


Developing Aggregate Plan

• Choose the basic strategy:– Level, chase, or hybrid

• Determine the production rate: – Level plan with back orders: rate = average

demand over the planning horizon– Level plan without back orders: rate is set to meet

all demand on time – Chase plan: assign regular production, amount of

overtime & subcontracted work to meet demand


Developing the Aggregate Plan

• Calculate the size of the workforce needed• Calculate period-to-period inventory levels,

shortages, expected hiring & firings, and overtime

• Calculate period-by-period costs, then sum for total costs of the plan

• Evaluate the plan’s impact on customer service and human resource issues


Evaluating Alternative Plans

• Level strategy plan

• Chase strategy plan


Level Strategy


Non-Financial Criteria

• Operations perspective:– Smooth & even flow is easy to manage

• Human resources perspective:– Nobody hired or fired, no overtime or furloughs, so

employee morale should be fine

• Marketing perspective:– All demand met, so no customer service issues


Chase Strategy


Non-Financial Criteria

• Operations perspective:– Can operations ramp up & back down this quickly?

– Much more difficult to accomplish

• Human resources perspective:– Will employees tolerate being hired & fired so

rapidly? – What about training & learning curve issues?

• Marketing perspective:– All demand is met (assuming no strikes)


Service Planning Issues

• Intangible products can’t be inventoried

• Possible approaches:– Try to proactively shift demand away from

peaks– Use overtime or subcontracting to handle

peaks– Allow lost sales


The End

Copyright © 2002 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United State Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

Reid & Sanders, Operations Management © Wiley 2002 Aggregate Planning 13 C H A P T E R.

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