Mark M. Davis
Janelle Heineke
OPERATIONS MANAGEMENT
INTEGRATING MANUFACTURING AND SERVICES
FIFTH EDITION
PowerPoint Presentation by
Charlie Cook, The University of West Alabama
Copyright ©2005, The McGraw-Hill Companies, Inc.
CHAPTER
13
Aggregate Planning
PowerPoint Presentation by Charlie Cook
The University of West Alabama
Copyright © 2005 The McGraw-Hill Companies. All rights reserved.
CHAPTER OBJECTIVES
• Demonstrate how aggregate planning provides the link
between long-range strategic planning and short-range
scheduling.
• Present alternative strategies for matching supply and
demand: adjusting supply (an operations function) or
adjusting demand (a marketing function).
• Introduce alternative strategies for developing aggregate
plans and ways to identify their strengths and
weaknesses.
• Define marginal costs and total costs as they pertain to
aggregate planning.
• Introduce yield management as a tool for matching supply
and demand in service operations.
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McGraw-Hill/Irwin 13–3
Managerial Issues
• Translating long-range strategic plans into daily work
schedules for the shop floor.
• Using aggregate planning to develop intermediate-range
plans that link the long-range strategic plan and the shortrange operational plan.
• Developing aggregate plans that match the demand for
products with the firm’s ability to supply the products and
to do so at minimum cost.
• Coordinating marketing management and operations to
develop an aggregate plan that is both effective and
efficient.
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McGraw-Hill/Irwin 13–4
Overview of Operational
Planning Activities
• Long-Range Planning
– Focuses on strategic issues relation to capacity,
process, selection, and plant location.
• Intermediate-Range Planning
– Focuses on tactical issues pertaining to aggregate
workforce and material requirements for the coming
year.
• Short-Range Planning
– Addresses day-to-day issues of scheduling workers
on jobs at assigned work stations.
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McGraw-Hill/Irwin 13–5
Overview of
Manufacturing
Planning
Activities
Exhibit 13.1
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McGraw-Hill/Irwin 13–6
Intermediate-Range Planning
• Aggregate Production Planning
–The process for determining the most cost effective
way to match supply and demand over the next 12–18
months.
• Item Forecasting
–Estimating specific products (and replacement parts),
which, when integrated with the aggregate production
plan, becomes the output requirement for the master
production schedule (MPS).
–The process of monitoring and integrating this
information is termed demand management.
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McGraw-Hill/Irwin 13–7
Intermediate-Range Planning (cont’d)
• Master Production Scheduling (MPS)
–Short-term scheduling of specific end product
requirements for the next several quarters.
• Rough-Cut or Resource Capacity Planning
–Determining that adequate production capacity and
warehousing are available to meet demand.
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Aggregate Production Planning
• Production Rate
–The capacity of output per unit of time (such as units
per day or units per week.
• Workforce Level
–Number of workers required to provide a specified level
of production.
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Required Inputs to
the Production Planning System
Exhibit 13.2
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McGraw-Hill/Irwin 13–10
Aggregate Production Planning (cont’d)
• Inventory on Hand
–The surplus of units that results when production
exceeds demand in a given time period.
• Backlog (or Stockout)
–The deficit in units that results when demand exceeds
the number of units produced in a given time period.
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McGraw-Hill/Irwin 13–11
Production Planning Strategies
• Chase Strategy
–Matching the production rate to exactly meet the order
rate by hiring and laying off workers as the order rate
varies.
• Stable Workforce—Variable Work Hours
–Varying output by varying the number of hours worked
through flexible schedules or overtime.
• Level Strategy
–Maintain a stable workforce working at constant output
rate; absorb demand variations with inventory,
backlogs, or lost sales.
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McGraw-Hill/Irwin 13–12
Production Planning Strategies (cont’d)
• Pure Strategy
–Either a chase strategy when product exactly matches
demand or a level strategy when production remains
constant over a specified number of periods.
• Mixed Strategy
–A combination of chase and level strategies to match
supply and demand.
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McGraw-Hill/Irwin 13–13
Examples of Pure Chase and Pure Level
Strategies
Exhibit 13.3
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Aggregate Production Planning
• Relevant Costs
–Basic production costs (fixed and variable)
–Costs associated with changes in the production rate
(e.g., labor costs)
–Inventory holding costs
–Backlog (stockout) costs
• Budgets
–Aggregate planning helps justify
requests for organizational
resources.
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McGraw-Hill/Irwin 13–15
Aggregate Planning Techniques
• Trial and Error
–Costing out the production alternatives and choosing
the one with the lowest cost.
• Linear Programming
• Linear Decision Rule
• Various Heuristic Methods
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McGraw-Hill/Irwin 13–16
Aggregate Planning Techniques (cont’d)
• Full Costs
–All of the actual, out-of-pocket costs associated with a
particular aggregate plan.
–Used for developing a labor and material budget.
• Marginal (Incremental) Costs
–Unique costs attributable to a particular aggregate plan
that are above and beyond those required to build the
product by its most economical means.
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McGraw-Hill/Irwin 13–17
New England Shirt Company
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McGraw-Hill/Irwin 13–18
New England Shirt Company (cont’d)
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McGraw-Hill/Irwin 13–19
Forecast Demand and Workdays
for the D&H Company
Exhibit 13.4
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McGraw-Hill/Irwin 13–20
First Alternative:
Pure Chase Strategy
Exhibit 13.5
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McGraw-Hill/Irwin 13–21
Second Alternative: Pure Level Strategy
Exhibit 13.6
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Third Alternative: Minimum Workforce with Subcontracting Strategy
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Exhibit 13.7
McGraw-Hill/Irwin 13–23
Fourth Alternative: Constant Workforce with Overtime Strategy
Exhibit 13.8
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Summary of Costs for
Alternative Aggregate Plans
Exhibit 13.9
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Actual Demand Requirement
for Full-Time Direct Employees and
Full-Time-Equivalent (FTE) Part-Time Employees
Note: Some workweeks are staggered to include weekdays, but this
does not affect the number of workdays per employee.
*Full-time days are derived by multiplying the number of days in each
month by the number of workers.
Exhibit 13.10
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Three Possible Plans for
the Parks and Recreation Department
Exhibit 13.11
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Yield Management
• Yield (Revenue) Management
–The concept used in service operations with high-fixed
costs and low-variable costs that attempts to match
supply and demand (a chase strategy) to maximize
capacity utilization.
• Yield Management Requires:
–The ability to segment the market
–High-fixed and low-variable costs where additional sales
create more profits
–Product perishability (cannot be inventoried)
–Lower-priced capacity that can be presold
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Comparison of Costs for All Three Alternatives
Exhibit 13.12
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McGraw-Hill/Irwin 13–29