Process planning

Long
range Strategic capacity planning

Intermediate Forecasting
& demand Sales and operations (aggregate) planning
range management
Sales plan Aggregate operations plan
Manufacturing
Services
Master scheduling

Material requirements planning

Weekly workforce and

Order scheduling customer scheduling
Short
range Daily workforce and customer scheduling
 Aggregate Planning
for Services
1. Most services can’t be inventoried
2. Demand for services is difficult to predict
3. Capacity is also difficult to predict
4. Service capacity must be provided at the
appropriate place and time
5. Labor is usually the most constraining
resource for services
 Balancing Aggregate Demand
and Aggregate Production Capacity
10000
10000
Suppose
Supposethe thefigure
figureto
to 8000
the
theright
rightrepresents
represents 8000 7000
6000
forecast
forecastdemand
demandin in 6000 5500
4500
units
units 4000

Now
Nowsuppose
supposethis
this 2000
lower
lowerfigure
figurerepresents
represents 0
the
theaggregate
aggregatecapacity
capacity Jan Feb Mar Apr May Jun
of
ofthe
thecompany
companyto to
9000
meet
meetdemand
demand 10000
8000
8000
What 6000
Whatwe
wewant
wanttotodo
doisis 6000
4500 4000
balance
balanceout
outthe
the 4000
4000
production
productionrate,
rate,
workforce
workforcelevels,
levels,and
and
2000

inventory
inventorytotomake
make 0
these Jan Feb Mar Apr May Jun
these figuresmatch
figures matchupup
 Aggregate Planning
• Provides the quantity and timing of
production for intermediate future
– Usually 3 to 18 months into future
• Combines (‘aggregates’) production
– Often expressed in common units
• Example: Hours, dollars, equivalents

• Involves capacity and demand

variables
 Aggregate Planning
• Meet demandGoals
• Use capacity
efficiently
• Meet inventory
policy
• Minimize cost
– Labor
– Inventory
– Plant & equipment
– Subcontract
 Aggregate Planning Strategies
Pure Strategies
• Capacity Options — change
capacity:
– changing inventory levels
– varying work force size by hiring or
layoffs
– varying production capacity through
overtime or idle time
– subcontracting
– using part-time workers
Aggregate Planning Strategies
Pure Strategies
• Demand Options — change demand:
– influencing demand
– backordering during high demand
periods
– counterseasonal product mixing
Capacity Expansion
 Volume & certainty of anticipated
demand
 Strategic objectives for growth
 Costs of expansion & operation
 Incremental or one-step
expansion
Capacity Expansion Strategies
(a) Capacity lead strategy (b) Capacity lag strategy

Capacity
Demand

Units Units

Demand Capacity

Time Time

(c) Average capacity strategy (d) Incremental vs. one-

one-step expansion

One-
One-step expansion

Capacity

Units Units
Incremental
expansion
Demand

Demand

Time Time
 Aggregate Operations
Planning
 Matches market demand to company
resources
 Expresses demand, resources, and
capacity in general terms
 Develops a strategy for economically
meeting demand
 Establishes a company-wide game plan
for allocating resources
Contd…
 Aggregate Operations Planning
• 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)
• Product group or broad category (Aggregation)
• This planning is done over an intermediate-range
planning period of 6 to18 months
Inputs and Outputs to APP
Capacity
Capacity Strategic
Strategic Company
Company
Constraints
Constraints Objectives
Objectives Policies
Policies

Aggregate
Aggregate
Demand
Demand Financial
Financial
Production
Production
Forecasts
Forecasts Constraints
Constraints
Planning
Planning

Production
Production Units
Units or
or dollars
dollars
Size
Size of
of Inventory
Inventory
per
per month
month subcontracted,
subcontracted,
Workforce
Workforce Levels
Levels
(in
(in units
units or
or $)
$) backordered,
backordered, or
or lost
lost
 Adjusting Capacity to
Meet Demand
1. Producing at a constant rate and using inventory
to absorb fluctuations in demand (level
production)
2. Hiring and firing workers to match demand (chase
demand)
3. Maintaining resources for high demand levels
4. Increase or decrease working hours (overtime
and undertime)
5. Subcontracting work to other firms
6. Using part-time workers
7. Providing the service or product at a later time
period (backordering)
 Strategy Details
 Level production - produce at constant
rate & use inventory as needed to meet
demand
 Chase demand - change workforce levels
so that production matches demand
 Maintaining resources for high demand
levels - ensures high levels of customer
service
 Strategy Details
 Overtime & undertime - common when
demand fluctuations are not extreme
 Subcontracting - useful if supplier meets
quality & time requirements
 Part-time workers - feasible for unskilled
jobs or if labor pool exists
 Backordering - only works if customer is
willing to wait for product/services
 Level Production
Demand

Production
Units

Time
 Chase Demand
Demand

Production
Units

Time
APP Using Pure Strategies
QUARTER SALES FORECAST (LB)
Spring 80,000
Summer 50,000
Fall 120,000
Winter 150,000

Hiring cost = $100 per worker

Firing cost = $500 per worker
Inventory carrying cost = $0.50 pound per quarter
Production per employee = 1,000 pounds per quarter
Beginning work force = 100 workers
Level Production Strategy
SALES PRODUCTION
QUARTER FORECAST PLAN INVENTORY
Spring 80,000 100,000 20,000
Summer 50,000 100,000 70,000
Fall 120,000 100,000 50,000
Winter 150,000 100,000 0
400,000 140,000

Cost = 140,000 pounds x 0.50 per pound = $70,000

 Chase Demand Strategy
SALES PRODUCTION WORKERS WORKERS WORKERS
QUARTER FORECAST PLAN NEEDED HIRED FIRED
Spring 80,000 80,000 80 0 20
Summer 50,000 50,000 50 0 30
Fall 120,000 120,000 120 70 0
Winter 150,000 150,000 150 30 0
100 50

Cost = (100 workers hired x $100) + (50 workers fired x $500)

= $10,000 + 25,000 = $35,000
 Aggregate Planning Examples:
Unit Demand and Cost Data
Suppose
Supposewewehave
havethethefollowing
followingunit
unit
demand
demandand
andcost
costinformation:
information:
Demand/mo Jan Feb Mar Apr May Jun
4500 5500 7000 10000 8000 6000
Materials $5/unit
Holding costs $1/unit per mo.
Marginal cost of stockout $1.25/unit per mo.
Hiring and training cost $200/worker
Layoff costs $250/worker
Labor hours required .15 hrs/unit
Straight time labor cost $8/hour
Beginning inventory 250 units
Productive hours/worker/day 7.25
Paid straight hrs/day 8
Additional Information
The no. of working days in each month
are as follows:
Jan Feb Mar Apr May June
22 19 21 21 22 20
Let there be 7 workers to start with .
 Below
Beloware
arethe
thecomplete
completecalculations
calculationsfor
forthe
theremaining
remaining
months
monthsin
inthe
thesix
sixmonth
monthplanning
planninghorizon
horizon
Jan Feb Mar Apr May Jun
Days/mo 22 19 21 21 22 20
Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145
Units/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 Jun

Demand 4,500 5,500 7,000 10,000 8,000 6,000
Beg. inv. 250
Net req. 4,250 5,500 7,000 10,000 8,000 6,000
Req. workers 3.997 5.989 6.897 9.852 7.524 6.207
Hired 2 1 3
Fired 3 2 1
Workforce 4 6 7 10 8 7
Ending inventory 0 0 0 0 0 0
 Below are the complete calculations of Chase Strategy for the
six month planning horizon with the other costs included
Jan Feb Mar Apr May Jun
Demand 4,500 5,500 7,000 10,000 8,000 6,000
Beg. inv. 250
Net req. 4,250 5,500 7,000 10,000 8,000 6,000
Req. workers 3.997 5.989 6.897 9.852 7.524 6.207
Hired 2 1 3
Fired 3 2 1
Workforce 4 6 7 10 8 7
Ending inventory 0 0 0 0 0 0

Jan Feb Mar Apr May Jun Costs

Material $21,250.00 $27,500.00 $35,000.00 $50,000.00 $40,000.00 $30,000.00 203,750.00
Labor 5,627.59 7,282.76 9,268.97 13,241.38 10,593.10 7,944.83 53,958.62
Hiring cost 400.00 200.00 600.00 1,200.00
Firing cost 750.00 500.00 250.00 1,500.00

$260,408.62
Level Workforce Strategy (Surplus
and Shortage Allowed)
Lets
Letstake
takethe
thesame
sameproblem
problem
as
asbefore
beforebut
butthis
thistime
timeuse
usethe
the
Level
LevelWorkforce
Workforcestrategy
strategy Jan
Demand 4,500
This
Thistime
timewe
wewill
willseek
seektotouse
use
aaworkforce Beg. inv. 250
workforcelevel
levelof
of66workers
workers
Net req. 4,250
Workers 6
Production 6,380
Ending inventory 2,130
Surplus 2,130
Shortage
 Below
Below are
are the
thecomplete
complete calculations
calculations for
forthe
the remaining
remaining
months
months in
inthe
thesix
six month
monthplanning
planninghorizon
horizon

Jan Feb Mar Apr May Jun

Demand 4,500 5,500 7,000 10,000 8,000 6,000
Beg. inv. 250 2,130 2,140 1,230 -2,680 -1,300
Net req. 4,250 3,370 4,860 8,770 10,680 7,300
Workers 6 6 6 6 6 6
Production 6,380 5,510 6,090 6,090 6,380 5,800
Ending inventory 2,130 2,140 1,230 -2,680 -1,300 -1,500
Surplus 2,130 2,140 1,230
Shortage 2,680 1,300 1,500

Note,
Note, ifif we
we recalculate
recalculate this
this sheet
sheet with
with 77 workers
workers
we
we would
would havehave aa surplus
surplus
 Jan Feb Mar Apr May Jun
4,500 5,500 7,000 10,000 8,000 6,000
250 2,130 10 -910 -3,910 -1,620
4,250 3,370 4,860 8,770 10,680 7,300
6 6 6 6 6 6
6,380 5,510 6,090 6,090 6,380 5,800
2,130 2,140 1,230 -2,680 -1,300 -1,500
2,130 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 $48,000.00 Labor
31,900 27,550 30,450 30,450 31,900 29,000 181,250.00 Material
2,130 2,140 1,230 5,500.00 Storage
3,350 1,625 1,875 6,850.00 Stockout

$241,600.00
 Aggregate Planning
for Services
1. Most services can’t be inventoried
2. Demand for services is difficult to predict
3. Capacity is also difficult to predict
4. Service capacity must be provided at the
appropriate place and time
5. Labor is usually the most constraining
resource for services