Chapter 16 Aggregate Sales and Operations Planning

1. Chapter 16Aggregate Sales and Operations Planning • Operations Planning Overview • The Hierarchical Planning Process • Aggregate Production Planning • Examples: Chase and Level strategies

2. Operations Planning Overview • Long-range planning • Greater than one year planning horizon • Usually with yearly increments • Intermediate-range planning • Six to eighteen months • Usually with monthly or quarterly increments • Short-range planning • One day to less than six months • Usually with weekly increments

3. Process Planning Long- range Strategic Capacity Planning Forecasting and Demand Mgmt. Sales and Operations (Aggregate) Planning Sales Plan Aggregate Operations Plan Intermediate- range Manufacturing Services Master Production Scheduling Material Requirements Planning Weekly Workforce & Customer Scheduling Order Scheduling Short- range Daily Workforce & Customer Scheduling

4. Decision Level Decision Process Forecasts needed Allocates production among plants Annual demand by item and by region Corporate Determines seasonal plan by product type Monthly demand for 15 months by product type Plant manager Determines monthly item production schedules Monthly demand for 5 months by item Shop superintendent Hierarchical Production Planning

5. Aggregate Planning • Goal: Specify the optimal combination of • Product group or broad category - family (Aggregation) • Intermediate-range planning period: 6-18 months

6. Balancing Aggregate Demandand Aggregate Production Capacity 10000 Suppose the figure to the right represents forecast demand in units. 10000 8000 8000 7000 6000 5500 6000 4500 Now suppose this lower figure represents the aggregate capacity of the company to meet demand. 4000 2000 0 Jan Feb Mar Apr May Jun 9000 10000 What we want to do is balance out the production rate, workforce levels, and inventory to make these figures match up. 8000 8000 6000 6000 4000 4500 4000 4000 2000 0 Jan Feb Mar Apr May Jun

7. Aggregate Scheduling Goals 13-13

8. Competitors’behavior Raw material availability Market demand External capacity Economic conditions Current physical capacity Current workforce Inventory levels Activities required for production Required Inputs to the Production Planning System External to firm Planning for production Internal to firm

9. Key Strategies for Meeting Demand • Chase - Match production to customer order rate by hiring and laying off employees • Level - Stable workforce with constant output, inventory and backlogs absorb fluctuations in demand • Some combination of the two - Stable workforce, variable hours - vary output through overtime or flexible schedules

10. Costs Relevant to Aggregate Planning • Direct and indirect labor costs and overtime • Costs associated with changing the production rate - hiring, training, layoffs, temps • Inventory holding costs - costs of capital, storage, insurance, taxes, spoilage, obsolescence • Backordering costs - expediting, loss of goodwill, lost sales due to stocking out

11. Aggregate Planning Examples: Unit Demand and Cost Data Suppose we have the following unit demand and cost information: Demand/mo Jan Feb Mar Apr May Jun 4500 7500 10500 11000 8000 5000 Materials $5/unit Holding costs $1/unit per mo. based on ending inv. Marginal cost of backorder $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

12. Cut-and-Try Example: Determining Straight Labor Costs and Output Given the demand and cost information below, what are the aggregate hours/worker/month, units/worker, and dollars/worker? Demand/mo Jan Feb Mar Apr May Jun 4500 7500 10500 11000 8000 5000 Productive hours/worker/day 7.25 Paid straight hrs/day 8

13. Chase Strategy(Hiring & Firing to meet demand/ No Shortage) Lets assume our current workforce is 7 workers.

14. Below are the complete calculations for the remaining months in the six month planning horizon.

15. Below are the complete calculations for January with the other costs included.

16. Below are the complete calculations for the remaining months in the six month planning horizon with the other costs included.

17. Level Workforce Strategy (Surplus and Shortage Allowed - minimize ending inventory) Lets take the same problem as before but this time use the Level Workforce strategy. What workforce level will minimize ending inventory? Total demand = Beginning inventory: Total production required = Minimum production required per month = Workers required = Actual monthly production =

18. Below are the complete calculations for the six months in the planning horizon.

20. Inputs Outputs Beginning inventory Projected inventory Master scheduling Forecast Master production schedule Customer orders Uncommitted inventory Master Scheduling Process - Determine amounts and dates of each end itemto be produced

21. Master Scheduling Drives: • Rough cut capacity planning verifies equipment and labor availability • Material requirements planning (MRP) - breaks end product requirements into a materials plan for component parts