Operations Management Aggregate Planning

1. Operations ManagementAggregate Planning

2. Anheuser-Busch • Anheuser-Busch produces nearly 40% of the beer consumed in the U.S. • Matches fluctuating demand by brand to specific plant, labor, and inventory capacity • High facility utilization due to • meticulous cleaning between batches • effective maintenance • efficient scheduling

3. Aggregate Planning • Provides quantity and timing of production for the intermediate future (usually 3 to 18 months ahead) • Objective to minimize cost over the planning period while matching demand • Links firm’s strategic goals and production plans (manufacturing) or work force schedules (service)

4. Aggregate Planning Goals • Meet demand • Use capacity efficiently • Meet inventory policy • Minimize cost • Labor • Inventory • Plant & equipment • Subcontract

5. Aggregate Planning Variables • Production rate • Labor levels • Inventory levels • Overtime work • Subcontracting rates

6. Responsible: Operations managers Short-range plans Job assignments Ordering Job scheduling Dispatching Intermediate-range plans Sales planning Production planning and budgeting Setting employment, inventory, subcontracting levels Analyzing operating plans Responsible: Top executives Responsible: Operations managers, supervisors, foremen Long-range plans R&D New product plans Capital expenses Facility location, expansion 1 year 5 years Today 3 Months Planning Horizon Planning Horizons

7. Marketplace and Demand Research and Technology Product Decisions Process Planning & Capacity Decisions Demand Forecasts, orders Work Force Raw Materials Available Inventory On Hand Aggregate Plan for Production External Capacity Subcontractors Master Production Schedule MRP system Detailed Work Schedules Relationships of the Aggregate Plan

8. Aggregate Planning StrategiesPure Strategies • Capacity Options — change capacity: • changing inventory levels • varying work force size by hiring or layoffs • varying production capacity through overtime or idle time • subcontracting • using part-time workers

9. Aggregate Planning StrategiesPure Strategies • Demand Options — change demand: • influencing demand • backordering during high demand periods • Counter seasonal product mixing

10. Option Advantage Disadvantage Some Comments Changing Changes in Inventory Applies mainly inventory levels human resources holding costs; to production, are gradual, not Shortages may not service, abrupt result in lost operations production sales changes Varying Avoids use of Hiring, layoff, Used where size workforce size other alternatives and training of labor pool is by hiring or costs large layoffs Aggregate Scheduling Options - Advantages and Disadvantages

11. Option Advantage Disadvantage Some Comments Varying Matches seasonal Overtime Allows production rates fluctuations premiums, tired flexibility within through overtime without workers, may not the aggregate or idle time hiring/training meet demand plan costs Subcontracting Permits Loss of quality Applies mainly flexibility and control; reduced in production smoothing of the profits; loss of settings firm's output future business Advantages/Disadvantages - Continued

12. Option Advantage Disadvantage Some Comments Using part-time Less costly and High Good for workers more flexible turnover/training unskilled jobs in than full-time costs; quality areas with large workers suffers; temporary labor scheduling pools difficult Influencing Tries to use Uncertainty in Creates demand excess capacity. demand. Hard to marketing ideas. Discounts draw match demand to Overbooking new customers. supply exactly. used in some businesses. Advantages/Disadvantages - Continued

13. Option Advantage Disadvantage Some Comments Back ordering May avoid Customer must Many companies during high- overtime. Keeps be willing to backorder. demand periods capacity constant wait, but goodwill is lost. Counterseasonal Fully utilizes May require Risky finding products and resources; allows skills or products or service mixing stable workforce. equipment services with outside a firm's opposite demand areas of patterns. expertise. Advantage/Disadvantage - Continued

14. Chase Strategy Level Strategy Production equals demand Production rate is constant The Extremes

15. Aggregate Planning Strategies • Mixed strategy • Combines 2 or more aggregate scheduling options • Level scheduling strategy • Produce same amount every day • Keep work force level constant • Vary non-work force capacity or demand options • Often results in lowest production costs

16. Aggregate Planning Methods • Graphical & charting techniques • Popular & easy-to-understand • Trial & error approach • Mathematical approaches • Transportation method • Linear decision rule • Management coefficients model • Simulation

17. The Graphical Approach to Aggregate Planning • Forecast the demand for each period • Determine the capacity for regular time, overtime, and subcontracting, for each period • Determine the labor costs, hiring and firing costs, and inventory holding costs • Consider company policies which may apply to the workers or to stock levels • Develop alternative plans, and examine their total costs OM Session 21: Bishal Shrestha

18. 70 Forecast Level production using Demand 60 average monthly forecast demand 50 40 Production rate per working day 30 20 10 0 Jan Feb Mar Apr May Jun 22 18 21 21 22 20 Forecast and Average Forecast Demand

19. AP - Example Mary Rhodes has rcvd the following estimates of demand requirements Stockout costs = $100, Inventory carrying cost = $25 per unit per month, 0 ending inventory, evaluate the two options on incremental basis Plan A: Produce at steady rate (minimum reqmt) and subcontract rest at $60 per unit Plan B: Vary workforce, which currently performs at 13000 units a month. Hiring cost is $ 3000 per 100 units and firing cost is $6000 per 100 units