Operations Management

Aggregate Planning
Operations Planning

▪ SCHEDULING DECISIONS address the

problem of matching productivity to
fluctuating demand
▪ AGGREGATE PLANNING is an approach
to determine the quantity and timing of
production for the intermediate future.
Aggregate Planning

▪ Objective of Aggregate planning is then:

–To Meet forecast demand while minimizing
costs over the planning period
Aggregate Planning Strategies

▪ CAPACITY OPTIONS
1. Changing inventory levels
2. Varying workforce size by
hiring or layoffs
3. Varying production rates
through overtime or idle
time
4. Subcontracting
5. Using part-time workers
Aggregate Planning Strategies

▪ DEMAND OPTIONS
6. Influencing demand
7. Back ordering during high
demand periods
8. Counter-seasonal product and
service mixing
Mixing options to Develop a Plan

▪ 1. Chase strategy – planning strategy that sets production

equal to forecasted demand.
▪ 2. Level strategy – maintaining a constant output rate,
production rate, or workforce level over the planning
horizon
▪ 3. Mixed strategy – uses two or more controllable variables
to set a feasible production plan
Graphical method

▪ Popular and easy technique

▪ Trial and error approach
▪ Requires limited computations
▪ 1. Determine Demand for the period
▪ 2. Determine capacity for regular time, overtime and subcontractors
▪ 3. Find Labor costs, holding, firing etc.
▪ 4. Look at the company’s policy on stock levels and # of workers
▪ 5. Develop alternate plans
 Example

▪ Zesto Corp. has a new fruit drink for

which it has high hopes. Vincent Lao, Period Jan Feb March April
the production planner, has
assembled the following cost data Forecast 1800 1100 1600 900
and demand forecast:
Evaluate the following plans Cost/Other Data
Previous quarter’s output 1,300 cases
▪ Plan A: Chase strategy that hires and
fires personnel as necessary to meet Beginning inventory 0 cases
the forecast Stockout cost P150 per case
▪ Plan B: A level strategy Inventory holding cost P40 per case at end of quarter
▪ Plan C: A level strategy that produces Hiring employees P40 per case
1,200 cases per quarter and meets Terminating employees P80 per case
the forecasted demand with Subcontracting cost P60 per case
inventory and subcontracting.
Unit cost on regular time P30 per case
Overtime cost P15 extra per case
Capacity on regular time 1,800 cases per quarter
 Chase Strategy Computations

Demand Ending Production Demand

Period Production
Forecast inventory days per day
Jan 1800 1800 1300 22 81.81818
Feb 1100 1800 700 18 61.11111
March 1600 1800 200 21 76.19048
5400 demand /82 April 900 1800 900 2142.85714
days = 65 workers 5400 3100 82

Plan A Costs
3100 x 40 per case Inventory Holding Costs 124000
30 per case x 65 workers x 82 days Regular labor 159900
other costs 0
283900
 Level Strategy

▪ Compute for Regular labor and subcontracting costs

▪ Look at the lowest output per demand forecast
▪ Compute for Regular work and subcontracting work
Demand Ending Production Demand 42 units
Period Production demand per
Forecast inventory days per day
81.8181 day x 82 days =
Jan 1800 1800 1300 22 8 3444 with
61.1111 regular
Feb 1100 1800 700 18 1
76.1904
workers
March 1600 1800 200 21 8
42.8571 5400-3444 =
April 900 1800 900 21 4 1956 with
5400 3100 82 subcontractors
 Level Strategy cont.

Plan B Costs
Regular Labor 159900 65 workers x30 x 82 days
Subcontracting 117360 1956 units x 60 per unit
other costs
277260
Mix Strategy

▪ Compute for different costs

– Production Costs
– Inventory Costs
– Labor Costs
– Holding Costs
 Mix Strategy cont.

Actual Invent Change Inventory Inventory Daily decre Cost

product ory in Stock Holding produ increase Extra ase in for
Perio Forecast in ion Invento outCost cost ction Basic in cost worke decre Total
d units ry rate Produ workers of rs asein costs
ction needed hiring neede g
costs d labor
Jan 1800 1200 700 700 0 28000 82 54000 0 0 0 0 82000

Feb 1100 1200 100 800 0 4000 61 33000 0 0 21 1200 38200

Marc 904.7 48904
h 1600 1200 -400 400 0 76 48000 15 619 0 0 .76
Apr 900 1200 300 700 0 12000 43 27000 0 0 0 0 39000
16200 904.7 20810
0 44000 0 619 1200 4.8
Mix Strategy cont.

Plan C Costs
Inventory Holding Cost 44000
Basic Production Cost 162000
Cost of Hiring 904.761905
Cost of Layoff 1200
208104.762
 Transportation Model example

Mar Apr May Costs

Demand 800 1000 750 Regular 40
Capacity Overtime 50
reg 700 700 700 Subcontract 70
overtime 50 50 50 carrying 2
subcontract 150 150 130
beginning 100
 Solved in a Transportation model

Regular Demand
Period Time Overtime Subcontract Forecast Initial Inventory 20 units
1 30 10 5 40 Regular 100
2 35 12 5 50 Overtime 150
3 30 10 5 40 Subcontractor 200
Carrying
cos/month 4