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Chapter 13 – Aggregate Planning

Explain business planning Explain sales and operations planning Identify different aggregate planning strategies &

options for changing demand and/or capacity in aggregate plans

Develop aggregate plans, calculate associated costs, and evaluate the plan in terms of operations, marketing, finance, and human resources

Describe differences between aggregate plans for service and manufacturing companies

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The Role of Aggregate Planning

Integral to part of the business planning process

Supports the strategic plan Also known as the production plan Identifies resources required for

operations for the next 6-18 months Details the aggregate production rate

and size of work force required

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The Role of the Aggregate Plan

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Types of Aggregate Plans Level Aggregate Plans

Maintains a constant workforce Sets capacity to accommodate average demand Often used for make-to-stock products like appliances Disadvantage- builds inventory and/or uses back orders

Chase Aggregate Plans Produces exactly what is needed each period Sets labor/equipment capacity to satisfy period demands Disadvantage- constantly changing short term capacity

Level Production

DemandDemand

Un

its

Un

its

TimeTime

ProductionProduction

Chase Demand

DemandDemand

Un

its

Un

its

TimeTime

ProductionProduction

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Level Plan Example Level production rate= 28,000 units/7 periods= 4000 units Level workforce= (4000 units x .64 std.)/160 = 16 people

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Chase Plan Example Chase hires and fires staff to exactly meet each

periods demand Period 1 = (500 units x .64 std.)/160 = 2 people, need

to fire 16 people

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Types of Aggregate Plans con’t

Hybrid Aggregate Plans Uses a combination of options Options should be limited to facilitate execution May use a level workforce with overtime & temps May allow inventory buildup and some

backordering May use short term sourcing

Aggregate Planning Options

Demand based options Reactive: uses finished goods inventories and backorders for fluctuations Proactive: shifts the demand patterns to minimize

fluctuations Shifting demand into other time periods Incentives Sales promotions Advertising campaigns Offering products or services with counter-cyclical demand

patterns Partnering with suppliers to reduce information distortion

along the supply chain Capacity based options

Changes output capacity to meet demand Uses overtime, under time, subcontracting, hiring, firing,

and part-timers – cost and operational implications

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Evaluating the Current Situation

Important to evaluate current situation in terms of: Point of Departure

Current % of normal capacity Options are different depending on present situation

Magnitude of change Larger changes need more dramatic measures

Duration of change Is the length of time a brief seasonal change? Is a permanent change in capacity needed?

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Developing the Aggregate Plan

Step 1- Choose strategy: level, chase, or HybridStep 2- Determine the aggregate production rateStep 3- Calculate the size of the workforceStep 4- Test the plan as follows:

Calculate Inventory, expected hiring/firing, overtime needsCalculate total cost of plan

Step 5- Evaluate performance: cost, service, human resources, and operations

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Aggregate Plans for Companies with Tangible Products

Plan A: Level aggregate plan using inventories and back orders

Plan B: Chase aggregate plan using hiring and firing

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Problem Data for Plans A & B

Data for Sophisticated Skates

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Plan A - Level Using Inventory & Backorders

First calculate the level

production rate

(14400/8=1800)

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Plan A Evaluation

Fill rate is 83.9% Fill rate is likely to low Inventory levels seem to be okay Human resources fires two

employees

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Plan B – Chase Aggregate Plan Using Hiring and Firing

Using the same problem data as previous example, develop a chase aggregate plan using hires and fires but no overtime production.

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Plan B Evaluation Plan B costs slightly less than the level

plan. Hiring demands ranges from two in

November to thirty-four in February Utilization is highest, 70.6%, in December

and even lower in the other months Space and equipment are underutilized in

every other month of the plan

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Aggregate Plans for Service Companies with Non-Tangible Products

Options remain the same – level, chase, and hybrid plans Overtime and under time can be used Staff can be hired and fired

Inventory cannot be used to level the service plan

All demand must be satisfied or lose business to a competing service provider

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Problem Data for Plans C, D, and E

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10111213141516171819202122232425

262728

A BCost Data

Regular time labor cost per hour $8.00Overtime labor cost per hour $12.00

Subcontracting cost per unit (labor only) $60.00Hiring cost per employee $250.00Firing cost per employee $150.00

Capacity DataBeginning workforce (employees) 60Service standard per call (hours) 4

Regular time available per period (hours) 160Overtime available per period (hours) 24

Demand Data (calls)Period 1 2400Period 2 1560Period 3 1200Period 4 2040Period 5 2760Period 6 1680Period 7 1320Period 8 2400

Total Number of Periods 8

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Plan C – Level Aggregate Plan with No Back Orders or Tangible Product

Staff of 69 people creates excessive UT (averages 30% UT) Cost per service call is $46.15 ($708,000 Divided by 15360 calls)

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Plan D – Hybrid Aggregate Plan Using Initial Workforce and OT as Needed

Costs reduced by $77K and under time to an average of 20% Cost per service call reduced to $41.13 (-$5.02)

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Plan E – Chase Aggregate Plan for Non-tangible Products Using Hiring and Firing

Total cost reduced by $114K over Plan F, utilization improved to 100%, and cost per service call now $33.72 (-$7.41)

Workforce fluctuates from 30-69 people- morale problems Solution?? Compare smaller permanent workforce, more OT??

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Aggregate Planning Bottom Line

The Aggregate plan must balance several perspectives

Costs are important but so are: Customer service Operational effectiveness Workforce morale

A successful AP considers each of these factors

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Chapter 13 Highlights Planning begins with the development of the strategic

business plan that provides company direction & objectives. Aggregate planning identifies resources required for operations for the next 6-18 months

Sales and operations planning integrates plans from the other functional areas and regularly evaluates company performance.

The level aggregate plan maintains the same size workforce and produces the same output each period. Inventories and backorders absorb fluctuations in demand. Chase aggregate plans change the capacity each period to match demand.

Demand patterns can be smoothed through pricing incentives, reduced prices for out-of-season purchases, or nonprime service times.