(aggregate planning)

Aggregate PlanningAggregate Planning(session 1,2)(session 1,2)

11

OutlineOutlineThe Planning ProcessThe Planning ProcessThe Nature of Aggregate PlanningThe Nature of Aggregate PlanningAggregate Planning StrategiesAggregate Planning Strategies

Capacity OptionsCapacity OptionsDemand OptionsDemand OptionsMixing Options to Develop a PlanMixing Options to Develop a Plan

Methods for Aggregate PlanningMethods for Aggregate PlanningGraphical MethodsGraphical MethodsMathematical ApproachesMathematical ApproachesComparison of Aggregate Planning MethodComparison of Aggregate Planning Method

22

Outline Outline –– ContinuedContinued

Aggregate Planning in ServicesAggregate Planning in ServicesRestaurantsRestaurantsHospitalsHospitalsNational Chains of Small Service National Chains of Small Service FirmsFirmsMiscellaneous ServicesMiscellaneous ServicesAirline IndustryAirline Industry

Yield ManagementYield Management

33

Aggregate PlanningAggregate Planning

Determine the quantity and timing of Determine the quantity and timing of production for the immediate futureproduction for the immediate future

Objective is to minimize cost over the Objective is to minimize cost over the planning period by adjustingplanning period by adjusting

Production ratesProduction ratesLabor levelsLabor levelsInventory levelsInventory levelsOvertime workOvertime workSubcontracting ratesSubcontracting ratesOther controllable variablesOther controllable variables

44


Required for aggregate planningRequired for aggregate planning

A logical overall unit for measuring sales A logical overall unit for measuring sales and outputand outputA forecast of demand for an intermediate A forecast of demand for an intermediate planning period in these aggregate termsplanning period in these aggregate termsA method for determining costsA method for determining costsA model that combines forecasts and A model that combines forecasts and costs so that scheduling decisions can costs so that scheduling decisions can be made for the planning periodbe made for the planning period

55

The Planning ProcessThe Planning ProcessLong-range plans (over one year)Research and DevelopmentNew product plansCapital investmentsFacility location/expansion

Intermediate-range plans (3 to 18 months)Sales planningProduction planning and budgetingSetting employment, inventory,

subcontracting levelsAnalyzing operating plans

Short-range plans (up to 3 months)Job assignmentsOrderingJob schedulingDispatchingOvertimePart-time help

Top executives

Operations managers

Operations managers, supervisors, foremen

ResponsibilityResponsibility Planning tasks and horizonPlanning tasks and horizon66


77

Quarter 1Quarter 1JanJan FebFeb MarMar

150,000150,000 120,000120,000 110,000110,000

Quarter 2Quarter 2AprApr MayMay JunJun

100,000100,000 130,000130,000 150,000150,000

Quarter 3Quarter 3JulJul AugAug SepSep

180,000180,000 150,000150,000 140,000140,000


•• Aggregate planning is a part of larger Aggregate planning is a part of larger production planning system; production planning system; therefore understanding the therefore understanding the interfaces between plan and several interfaces between plan and several internal and external factors is internal and external factors is essential for effective aggregate essential for effective aggregate planning.planning.

88


99

Aggregate Planning Aggregate Planning (Required Inputs to the Production (Required Inputs to the Production

Planning System)Planning System)

Currentphysical capacity

Planning for

production

External capacity

Competitors’behavior

Raw material availability

Market demand

Economic conditions

Current workforce

Inventory levels

Activities required for prod.

External to firm

Internal to firm

1010

Few Aggregate Planning Few Aggregate Planning StrategiesStrategies

1.1. Use inventories to absorb changes in Use inventories to absorb changes in demanddemand

2.2. Accommodate changes by varying Accommodate changes by varying workforce sizeworkforce size

3.3. Use partUse part--timers, overtime, or idle time to timers, overtime, or idle time to absorb changesabsorb changes

4.4. Use subcontractors and maintain a stable Use subcontractors and maintain a stable workforceworkforce

5.5. Change prices or other factors to Change prices or other factors to influence demandinfluence demand

1111

Capacity OptionsCapacity Options

1.1. Changing inventory levelsChanging inventory levelsIncrease inventory in low demand Increase inventory in low demand periods to meet high demand in periods to meet high demand in the futurethe futureIncreases costs associated with Increases costs associated with storage, insurance, handling, storage, insurance, handling, obsolescence, and capital obsolescence, and capital investment 15% to 40%investment 15% to 40%Shortages can mean lost sales Shortages can mean lost sales due to long lead times and poor due to long lead times and poor customer servicecustomer service

1212


2. Varying workforce size by hiring or 2. Varying workforce size by hiring or layoffs layoffs

Match production rate to demandMatch production rate to demandTraining and separation costs for Training and separation costs for hiring and laying off workers hiring and laying off workers New workers may have lower New workers may have lower productivityproductivityLaying off workers may lower morale Laying off workers may lower morale and productivityand productivity

1313


3. Varying production rate through 3. Varying production rate through overtime or idle timeovertime or idle time

Allows constant workforceAllows constant workforceMay be difficult to meet large May be difficult to meet large increases in demandincreases in demandOvertime can be costly and may Overtime can be costly and may drive down productivitydrive down productivityAbsorbing idle time may be Absorbing idle time may be difficultdifficult

1414


4. Subcontracting4. SubcontractingTemporary measure during Temporary measure during periods of peak demandperiods of peak demandMay be costlyMay be costlyAssuring quality and timely Assuring quality and timely delivery may be difficultdelivery may be difficultExposes your customers to a Exposes your customers to a possible competitorpossible competitor

1515


5. Using part5. Using part--time workerstime workersUseful for filling unskilled or low Useful for filling unskilled or low skilled positions, especially in skilled positions, especially in servicesservices

1616

Demand OptionsDemand Options

6. Influencing demand6. Influencing demandUse advertising or promotion Use advertising or promotion to increase demand in low to increase demand in low periodsperiodsAttempt to shift Attempt to shift demand to slow demand to slow periodsperiodsMay not be May not be sufficient to sufficient to balance demand balance demand and capacityand capacity

1717


7. Back ordering during high7. Back ordering during high--demand periodsdemand periods

Requires customers to wait for an Requires customers to wait for an order without loss of goodwill or order without loss of goodwill or the orderthe orderMost effective when there are few Most effective when there are few if any substitutes for the product if any substitutes for the product or serviceor serviceOften results in lost salesOften results in lost sales

1818


8. Counter seasonal product and 8. Counter seasonal product and service mixingservice mixing

Develop a product mix of Develop a product mix of counterseasonal itemscounterseasonal itemsMay lead to products or services May lead to products or services outside the companyoutside the company’’s areas of s areas of expertiseexpertise

1919

Methods for Aggregate Methods for Aggregate PlanningPlanning

A mixed strategy may be the best A mixed strategy may be the best way to achieve minimum costsway to achieve minimum costsThere are many possible mixed There are many possible mixed strategiesstrategiesFinding the optimal plan is not Finding the optimal plan is not always possiblealways possible

2020

Mixing Options to Mixing Options to Develop an aggregate PlanDevelop an aggregate Plan

Chase strategyChase strategyMatch output rates to demand Match output rates to demand forecast for each periodforecast for each periodVary workforce levels or vary Vary workforce levels or vary production rateproduction rateFavored by many service Favored by many service organizationsorganizations

2121

Mixing Options to Mixing Options to Develop a PlanDevelop a Plan

Level strategyLevel strategyDaily production is uniformDaily production is uniformUse inventory or idle time as bufferUse inventory or idle time as bufferStable production leads to better Stable production leads to better quality and productivityquality and productivity

Some combination of capacity Some combination of capacity options, a mixed strategy, might be options, a mixed strategy, might be the best solutionthe best solution

2222

Graphical MethodsGraphical Methods

Popular techniquesPopular techniques

Easy to understand and useEasy to understand and use

TrialTrial--andand--error approaches that do error approaches that do not guarantee an optimal solutionnot guarantee an optimal solution

Require only limited computationsRequire only limited computations2323

Graphical MethodsGraphical Methods

1.1. Determine the demand for each periodDetermine the demand for each period2.2. Determine the capacity for regular time, Determine the capacity for regular time,

overtime, and subcontracting each periodovertime, and subcontracting each period3.3. Find labor costs, hiring and layoff costs, Find labor costs, hiring and layoff costs,

and inventory holding costsand inventory holding costs4.4. Consider company policy on workers and Consider company policy on workers and

stock levelsstock levels5.5. Develop alternative plans and examine Develop alternative plans and examine

their total coststheir total costs

2424

Example 1Example 1ABC a manufacturer of roofing tiles has ABC a manufacturer of roofing tiles has developed monthly Forecasts for roofing tiles developed monthly Forecasts for roofing tiles and presented the period Januaryand presented the period January--June in the June in the table 1. table 1.

To represent the projected demand, ABC also To represent the projected demand, ABC also draws a graph (figure 1) that charts the daily draws a graph (figure 1) that charts the daily demand each month. The dotted line across the demand each month. The dotted line across the chart represents the production rate required to chart represents the production rate required to meet average demand which is computed by meet average demand which is computed by dividing the total expected demand by number of dividing the total expected demand by number of production days. production days.

2525

Table 1: Expected demand and number of production days.Table 1: Expected demand and number of production days.

MonthMonth Expected DemandExpected DemandProduction Production

DaysDaysDemand Per Day Demand Per Day

(computed)(computed)

JanJan 900900 2222 4141

FebFeb 700700 1818 3939

MarMar 800800 2121 3838

AprApr 1,2001,200 2121 5757

MayMay 1,5001,500 2222 6868

JuneJune 1,1001,100 2020 5555

6,2006,200 124124

2626

Figure 1Figure 1

70 70 –

60 60 –

50 50 –

40 40 –

30 30 –

0 0 –JanJan FebFeb MarMar AprApr MayMay JuneJune == MonthMonth

2222 1818 2121 2121 2222 2020 == Number ofNumber ofworking daysworking days

Prod

uctio

n ra

te p

er w

orki

ng d

ayPr

oduc

tion

rate

per

wor

king

day

Level production using average Level production using average monthly forecast demandmonthly forecast demand

Forecast demandForecast demand

Average Average requirementrequirement ==

Total expected demandTotal expected demandNumber of production daysNumber of production days

= = 50= = 50 units per dayunits per day6,2006,200124124

2727

Possible Strategy 1Possible Strategy 1Constant WorkforceConstant Workforce

Cost InformationCost InformationInventory carrying costInventory carrying cost $ 5$ 5 per unit per monthper unit per month

Subcontracting cost per unitSubcontracting cost per unit $10$10 per unitper unit

Average pay rateAverage pay rate $ 5$ 5 per hour per hour ($40($40 per dayper day))

Overtime pay rateOvertime pay rate $ 7$ 7 per hour per hour ((above above 88 hours per dayhours per day))

LaborLabor--hours to produce a unithours to produce a unit 1.61.6 hours per unithours per unit

Cost of increasing daily production rate Cost of increasing daily production rate (hiring and training)(hiring and training)

$300$300 per unitper unit

Cost of decreasing daily production rate Cost of decreasing daily production rate (layoffs)(layoffs)


Table 2Table 2

2828

Possible Strategy 1Possible Strategy 1

Table 13.3Table 13.3

Cost InformationCost InformationInventory carry costInventory carry cost $ 5$ 5 per unit per monthper unit per month









Plan 1 Plan 1 –– constant workforceconstant workforce

MonthProduction at

50 Units per DayDemand Forecast

Monthly Inventory Change

Ending Inventory

Jan 1,100 900 +200 200Feb 900 700 +200 400Mar 1,050 800 +250 650Apr 1,050 1,200 -150 500May 1,100 1,500 -400 100June 1,000 1,100 -100 0

1,850

Total units of inventory carried over from onemonth to the next = 1,850 units

Workforce required to produce 50 units per day = 10 workers

2929












MonthProduction at

50 Units per DayDemand Forecast

Monthly Inventory Change

Ending Inventory

Jan 1,100 900 +200 200Feb 900 700 +200 400Mar 1,050 800 +250 650Apr 1,050 1,200 -150 500May 1,100 1,500 -400 100June 1,000 1,100 -100 0

1,850

Total units of inventory carried over from onemonth to the next = 1,850 units

Workforce required to produce 50 units per day = 10 workers

Costs CalculationsInventory carrying $9,250 (= 1,850 units carried x $5

per unit)Regular-time labor 49,600 (= 10 workers x $40 per

day x 124 days)Other costs (overtime,

hiring, layoffs, subcontracting) 0

Total cost $58,850

3030


Cum

ulat

ive

dem

and

units

Cum

ulat

ive

dem

and

units

7,000 7,000 –

6,000 6,000 –

5,000 5,000 –

4,000 4,000 –

3,000 3,000 –

2,000 –

1,000 –

–JanJan FebFeb MarMar AprApr MayMay JuneJune

Cumulative forecast Cumulative forecast requirementsrequirements

Cumulative level Cumulative level production using production using average monthly average monthly

forecast forecast requirementsrequirements

Reduction Reduction of inventoryof inventory

Excess inventoryExcess inventory

6,200 units6,200 units

Figure 2Figure 23131

Possible Strategy 2Possible Strategy 2SubcontractingSubcontracting



(computed)(computed)JanJan 900900 2222 4141FebFeb 700700 1818 3939MarMar 800800 2121 3838AprApr 1,2001,200 2121 5757MayMay 1,5001,500 2222 6868JuneJune 1,1001,100 2020 5555

6,2006,200 124124

Minimum requirementMinimum requirement = 38= 38 units per dayunits per day

3232


70 70 –

60 60 –

50 50 –

40 40 –

30 30 –



Prod

uctio

n ra

te p

er w

orki

ng d

ayPr

oduc

tion

rate

per

wor

king

day

Level production Level production using lowest using lowest

monthly forecast monthly forecast demanddemand

Forecast demandForecast demand

3333











3434











In-house production = 38 units per day x 124 days

= 4,712 units

Subcontract units = 6,200 - 4,712= 1,488 units

3535












In-house production = 38 units per day x 124 days

= 4,712 units

Subcontract units = 6,200 - 4,712= 1,488 units

Costs CalculationsRegular-time labor $37,696 (= 7.6 workers x $40 per

day x 124 days)Subcontracting 14,880 (= 1,488 units x $10 per

unit)

Total cost $52,576

3636

Possible Strategy 3Possible Strategy 3Hiring and firingHiring and firing



(computed)(computed)JanJan 900900 2222 4141FebFeb 700700 1818 3939MarMar 800800 2121 3838AprApr 1,2001,200 2121 5757MayMay 1,5001,500 2222 6868JuneJune 1,1001,100 2020 5555

6,2006,200 124124

Production = Expected DemandProduction = Expected Demand

3737


70 70 –

60 60 –

50 50 –

40 40 –

30 30 –



Prod

uctio

n ra

te p

er w

orki

ng d

ayPr

oduc

tion

rate

per

wor

king

day Forecast demand and Forecast demand and

monthly productionmonthly production

3838











3939












MonthForecast

(units)

Daily Prod Rate

Basic Production

Cost (demand x

1.6 hrs/unit x $5/hr)

Extra Cost of Increasing Production (hiring cost)

Extra Cost of Decreasing Production (layoff cost) Total Cost

Jan 900 41 $ 7,200 — — $ 7,200

Feb 700 39 5,600 — $1,200 (= 2 x $600) 6,800

Mar 800 38 6,400 — $600 (= 1 x $600) 7,000

Apr 1,200 57 9,600 $5,700 (= 19 x $300) — 15,300

May 1,500 68 12,000 $3,300 (= 11 x $300) — 15,300

June 1,100 55 8,800 — $7,800 (= 13 x $600) 16,600

$49,600 $9,000 $9,600 $68,200

4040

Comparison of Three StrategiesComparison of Three Strategies

CostCost Plan 1Plan 1 Plan 2Plan 2 Plan 3Plan 3

Inventory carryingInventory carrying $ 9,250$ 9,250 $ 0$ 0 $ 0$ 0

Regular laborRegular labor 49,60049,600 37,69637,696 49,60049,600

Overtime laborOvertime labor 00 00 00

HiringHiring 00 00 9,0009,000

LayoffsLayoffs 00 00 9,6009,600

SubcontractingSubcontracting 00 14,88014,880 00

Total costTotal cost $58,850$58,850 $52,576$52,576 $68,200$68,200

Plan 2 is the lowest cost optionPlan 2 is the lowest cost option4141

Materials $5/unitHolding costs $1/unit per mo.Marginal cost of stockout $1.25/unit per mo.Hiring and training cost $200/workerLayoff costs $250/workerLabor hours required .15 hrs/unitStraight time labor cost $8/hourBeginning inventory 250 unitsProductive hours/worker/day 7.25Paid straight hrs/day 8

Suppose we have the following unit demand and cost information:Suppose we have the following unit demand and cost information:

Demand/mo Jan Feb Mar Apr May Jun

4500 5500 7000 10000 8000 6000

Example 2:Unit Demand & Cost DataExample 2:Unit Demand & Cost Data

4242

Jan Feb Mar Apr May JunDays/mo 22 19 21 21 22 20Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145Units/worker 1063.33 918.33 1015 1015 1063.33 966.67$/worker $1,408 1,216 1,344 1,344 1,408 1,280

Productive hours/worker/day 7.25Paid straight hrs/day 8

Demand/mo Jan Feb Mar Apr MayJun

4500 5500 7000 10000 80006000

Given the demand and cost information below, whatare the aggregate hours/worker/month, units/worker, and dollars/worker?

Given the demand and cost information below, whatare the aggregate hours/worker/month, units/worker, and dollars/worker?

7.25x22

7.25/0.15=48.33 & 48.33x22=1063.3322x8hrsx$8=$140

8

CutCut--andand--Try Example: Determining Try Example: Determining Straight Labor Costs and OutputStraight Labor Costs and Output

4343

Mixing Option: Chase StrategyMixing Option: Chase Strategy

JanDays/mo 22Hrs/worker/mo 159.5Units/worker 1,063.33$/worker $1,408

JanDemand 4,500Beg. inv. 250Net req. 4,250Req. workers 3.997HiredFired 3Workforce 4Ending inventory 0

Lets assume our current workforce is 7 workers.

Lets assume our current workforce is 7 workers.

First, calculate net requirements for production, or 4500-250=4250 units

Then, calculate number of workers needed to produce the net requirements, or 4250/1063.33=3.997 or 4 workers

Finally, determine the number of workers to hire/fire. In this case we only need 4 workers, we have 7, so 3 can be fired.

4444

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

Jan Feb Mar Apr May JunDays/mo 22 19 21 21 22 20Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145Units/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 JunDemand 4,500 5,500 7,000 10,000 8,000 6,000Beg. inv. 250Net req. 4,250 5,500 7,000 10,000 8,000 6,000Req. workers 3.997 5.989 6.897 9.852 7.524 6.207Hired 2 1 3Fired 3 2 1Workforce 4 6 7 10 8 7Ending inventory 0 0 0 0 0 0

4545

Jan Feb Mar Apr May JunDemand 4,500 5,500 7,000 10,000 8,000 6,000Beg. inv. 250Net req. 4,250 5,500 7,000 10,000 8,000 6,000Req. workers 3.997 5.989 6.897 9.852 7.524 6.207Hired 2 1 3Fired 3 2 1Workforce 4 6 7 10 8 7Ending inventory 0 0 0 0 0 0

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

$260,408.62

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

4646

Mixing Option: Level StrategyMixing Option: Level StrategySurplus and Storage allowedSurplus and Storage allowed

JanDemand 4,500Beg. inv. 250Net req. 4,250Workers 6Production 6,380Ending inventory 2,130Surplus 2,130Shortage

Lets take the same problem as before but this time use the Level Workforce strategy

Lets take the same problem as before but this time use the Level Workforce strategy

This time we will seek to use a workforce level of 6 workersThis time we will seek to use a workforce level of 6 workers

4747

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

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

Note, if we recalculate this sheet with 7 workers we would have a surplusNote, if we recalculate this sheet with 7 workers we would have a surplus

4848



Jan Feb Mar Apr May Jun4,500 5,500 7,000 10,000 8,000 6,000

250 2,130 10 -910 -3,910 -1,6204,250 3,370 4,860 8,770 10,680 7,300

6 6 6 6 6 66,380 5,510 6,090 6,090 6,380 5,8002,130 2,140 1,230 -2,680 -1,300 -1,5002,130 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 $48,000.0031,900 27,550 30,450 30,450 31,900 29,000 181,250.002,130 2,140 1,230 5,500.00

3,350 1,625 1,875 6,850.00

$241,600.00

Note, total costs under this strategy are less than Chase at $260.408.62

Note, total costs under this strategy are less than Chase at $260.408.62

LaborMaterialStorageStockout

4949

Mathematical ApproachesMathematical Approaches

Useful for generating strategiesUseful for generating strategiesTransportation Method of Linear Transportation Method of Linear ProgrammingProgramming

Produces an optimal planProduces an optimal plan

Management Coefficients ModelManagement Coefficients ModelModel built around managerModel built around manager’’s s experience and performanceexperience and performance

Other ModelsOther ModelsLinear Decision RuleLinear Decision RuleSimulationSimulation

5050

Transportation MethodTransportation MethodSales PeriodSales Period

MarMar AprApr MayMayDemandDemand 800800 1,0001,000 750750Capacity:Capacity:RegularRegular 700700 700700 700700OvertimeOvertime 5050 5050 5050SubcontractingSubcontracting 150150 150150 130130

Beginning inventoryBeginning inventory 100100 tirestires

CostsCostsRegular timeRegular time $40$40 per tireper tireOvertimeOvertime $50$50 per tireper tireSubcontractingSubcontracting $70$70 per tireper tireCarryingCarrying $ 2$ 2 per tire per monthper tire per month

5151

Transportation ExampleTransportation Example

Important pointsImportant points1.1. Carrying costs are Carrying costs are $2$2/tire/month. If /tire/month. If

goods are made in one period and held goods are made in one period and held over to the next, holding costs are over to the next, holding costs are incurredincurred

2.2. Supply must equal demand, so a Supply must equal demand, so a dummy column called dummy column called ““unused unused capacitycapacity”” is addedis added

3.3. Because back ordering is not viable in Because back ordering is not viable in this example, cells that might be used to this example, cells that might be used to satisfy earlier demand are not availablesatisfy earlier demand are not available

5252


Important pointsImportant points4.4. Quantities in each column designate the Quantities in each column designate the

levels of inventory needed to meet levels of inventory needed to meet demand requirementsdemand requirements

5.5. In general, production should be In general, production should be allocated to the lowest cost cell allocated to the lowest cost cell available without exceeding unused available without exceeding unused capacity in the row or demand in the capacity in the row or demand in the columncolumn

5353


5454

Management Coefficients Management Coefficients ModelModel

Builds a model based on managerBuilds a model based on manager’’s s experience and performanceexperience and performanceA regression model is constructed A regression model is constructed to define the relationships between to define the relationships between decision variablesdecision variablesObjective is to remove Objective is to remove inconsistencies in decision makinginconsistencies in decision making

5555

Other ModelsOther Models

Linear Decision RuleLinear Decision Rule

Minimizes costs using quadratic cost curvesMinimizes costs using quadratic cost curvesOperates over a particular time periodOperates over a particular time period

SimulationSimulation

Uses a search procedure to try different Uses a search procedure to try different combinations of variablescombinations of variablesDevelops feasible but not necessarily optimal Develops feasible but not necessarily optimal solutionssolutions

5656

Summary of Aggregate Summary of Aggregate Planning MethodsPlanning Methods

TechniquesTechniquesSolution Solution

ApproachesApproaches Important AspectsImportant Aspects

GraphicalGraphicalmethodsmethods

Trial and Trial and errorerror

Simple to understand and Simple to understand and easy to use. Many easy to use. Many solutions; one chosen solutions; one chosen may not be optimal.may not be optimal.

Transportation Transportation method of linear method of linear programmingprogramming

OptimizationOptimization LP software available; LP software available; permits sensitivity permits sensitivity analysis and new analysis and new constraints; linear constraints; linear functions may not be functions may not be realistic.realistic.

5757

Summary of Aggregate Summary of Aggregate Planning MethodsPlanning Methods

TechniquesTechniquesSolution Solution

ApproachesApproaches Important AspectsImportant Aspects

Management Management coefficients coefficients modelmodel

HeuristicHeuristic Simple, easy to implement; Simple, easy to implement; tries to mimic managertries to mimic manager’’s s decision process; uses decision process; uses regression.regression.

SimulationSimulation Change Change parametersparameters

Complex; may be difficult Complex; may be difficult to build and for managers to build and for managers to understand.to understand.

5858

Aggregate Planning in ServicesAggregate Planning in Services

Controlling the cost of labor is criticalControlling the cost of labor is critical

1.1. Accurate scheduling of laborAccurate scheduling of labor--hours to hours to assure quick response to customer assure quick response to customer demanddemand

2.2. An onAn on--call labor resource to cover call labor resource to cover unexpected demandunexpected demand

3.3. Flexibility of individual worker skillsFlexibility of individual worker skills4.4. Flexibility in rate of output or hours of Flexibility in rate of output or hours of

workwork

5959

Few Service ScenariosFew Service Scenarios

RestaurantsRestaurantsSmoothing the production Smoothing the production processprocessDetermining the optimal Determining the optimal workforce sizeworkforce size

HospitalsHospitalsResponding to patient demandResponding to patient demand

6060


National Chains of Small Service National Chains of Small Service FirmsFirms

Planning done at national level Planning done at national level and at local leveland at local level

Miscellaneous ServicesMiscellaneous ServicesPlan human resource Plan human resource requirementsrequirementsManage demandManage demand

6161


Airline industryAirline industryExtremely complex planning Extremely complex planning problemproblemInvolves number of flights, Involves number of flights, number of passengers, air and number of passengers, air and ground personnel, allocation of ground personnel, allocation of seats to fare classesseats to fare classesResources spread through the Resources spread through the entire systementire system

6262

Yield ManagementYield Management

Allocating resources to customers at Allocating resources to customers at prices that will maximize yield or prices that will maximize yield or revenuerevenue

1.1. Service or product can be sold in Service or product can be sold in advance of consumptionadvance of consumption

2.2. Demand fluctuatesDemand fluctuates3.3. Capacity is relatively fixedCapacity is relatively fixed4.4. Demand can be segmentedDemand can be segmented5.5. Variable costs are low and fixed costs Variable costs are low and fixed costs

are highare high6363

Yield Management: An ExampleYield Management: An Example

Demand Demand CurveCurve

Passed-up contribution

Money left on the table

Potential customers exist who Potential customers exist who are willing to pay more than the are willing to pay more than the $15$15 variable cost of the roomvariable cost of the room

Some customers who paid Some customers who paid $150$150 were actually willing were actually willing to pay more for the roomto pay more for the roomTotalTotal

$ $ contributioncontribution== ((PricePrice)) x x (50(50

roomsrooms))== ($150 ($150 -- $15)$15)

x x (50)(50)== $6,750$6,750

PricePrice

Room salesRoom sales

100100

5050

$150$150Price charged Price charged

for roomfor room

$15$15Variable costVariable cost

of roomof room 6464

Yield Management: An ExampleYield Management: An Example

Total $ contribution =Total $ contribution =(1(1st pricest price) x 30 ) x 30 roomsrooms + (2+ (2ndnd price) x 30 rooms =price) x 30 rooms =

($100 ($100 -- $15) x 30 + ($200 $15) x 30 + ($200 -- $15) x 30 =$15) x 30 =$2,550 + $5,550 = $8,100$2,550 + $5,550 = $8,100

Demand Demand CurveCurve

PricePrice

Room salesRoom sales

100100

6060

3030

$100$100Price 1Price 1

for roomfor room

$200$200Price 2Price 2

for roomfor room

$15$15Variable costVariable cost

of roomof room 6565

Yield Management MatrixYield Management Matrix

Dur

atio

n of

use

Unp

redi

ctab

lePr

edic

tabl

ePrice

Tend to be fixed Tend to be variable

Quadrant 1: Quadrant 2:

Movies HotelsStadiums/arenas Airlines

Convention centers Rental carsHotel meeting space Cruise lines

Quadrant 3: Quadrant 4:

Restaurants Continuing careGolf courses hospitals

Internet serviceproviders

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Making Yield Management WorkMaking Yield Management Work

1.1. Multiple pricing structures must Multiple pricing structures must be feasible and appear logical to be feasible and appear logical to the customer.the customer.

2.2. Forecasts of the use and duration Forecasts of the use and duration of use.of use.

3.3. Changes in demandChanges in demand

6767

(aggregate planning)

Documents

effective aggregate

aggregate planning session

aggregate planning strategies1

planning period5

demand overtime

aggregate terms

aggregate planningquarter

intermediate planning