1. Operations Management as a Competitive Weapon Module: Aggregate Planning

2. OM Course Framework 3. Dependability - Project Management - JIT 1. Cost - Design & Selection 4. Flexibility - Inventory - Supply Chain - Location - Forecasting - Aggregate Planning 2. Quality - TQM - SQC Module: Aggregate Planning

3. Learning Objectives At the end of this module, each student will be able to: • Discuss aggregate planning • Evaluate aggregate planning strategies • Discuss yield management Module: Aggregate Planning

4. 1. Aggregate Planning • Provides the quantity and timing of production for intermediate future • Uses (‘aggregate’) production • Involves capacity and demand variables • Why: Key interface to capital budgeting process Module: Aggregate Planning

5. Aggregate Planning Goal • For each period in the planning horizon, specify the appropriate combination of • production rate • workforce level • inventory level • Minimize sum of individual period’s total costs 6 Module: Aggregate Planning

6. - + + 2. AP Basic Strategies • Level capacity: • Chase demand: Module: Aggregate Planning

7. Other Considerations ChaseLevel Basic Cost: $ ?? $ ?? Hire & Fire  - Plant & Equipment  Inventory -  Total: $ ????? $ ????? Module: Aggregate Planning

8. 3. Yield Management Objective: Allocate Capacity Customers Price Time  Maximize Revenue Module: Aggregate Planning

9. Typical Characteristics 1. Capacity 2. Markets 3. Inventory 4. Purchase 5. Demand Module: Aggregate Planning

10. Example Module: Aggregate Planning

11. Solution Procedure: Marginal Cost CuUnderestimated demand (Cont. margin) [Denied reservation; have room] “spoilage” CoOverestimated demand (Alternative cost) [Have reservation; no room] “walked” “spill” Module: Aggregate Planning

12. 2 * Co = 2*200 = $400 7 * Cu = 7*80 = $560 Solution Procedure: Marginal Cost Example: Cu = $80 Co = $200 Suppose we arbitrarily plan on 2 no-shows. Module: Aggregate Planning

13. 1,200 1,000 ) 800 Expected Total Cost ($ 600 400 200 0 0 1 2 3 4 5 6 7 8 9 10 Planned No-Shows Solution Procedure: Marginal Cost Module: Aggregate Planning

14. Solution Procedure: Marginal Cost Rule: Add no-shows as long as total expected cost is decreasing. OR: P(Co) > (1 – P)Cu Stocking level  Cu / (Co + Cu) Module: Aggregate Planning

15. Solution Procedure: Marginal Cost Cu = $80; Co = $200; SL= 80/ (80 + 200) = 0.286 Module: Aggregate Planning