Operations
Management
Aggregate Planning
Chapter 13
Figure 13.1
Using our “Seasonally Adjusted Trend Sales Forecast
as a starting point, IDES Management has decided
upon the following sales forecast for 2003.
Our goal is to compare the cost of “Aggregate Plan
Options” that will deal with this sales forecast.
Quarter 1
Unit Sales Forecast
For 2003
307,200
Quarter 2
Quarter 3
379,200
360,000
Quarter 4
489,600
Total
1,536,000
Aggregate Planning Goals

Meet demand
(Sales Forecast)
 Use capacity efficiently
 Meet inventory policy
 Minimize cost
–
–
–
–
Labor
Inventory
Plant & equipment
Subcontract
Aggregate Planning Strategies
Pure Strategies
Demand Options — change demand:

influencing demand (e.g. change price)
 backordering during high demand periods
 counterseasonal product mixing
Aggregate Planning Strategies
Pure 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 (aka “outsourcing”)
 using part-time workers
Aggregate Scheduling Options Advantages and Disadvantages
Option
Advantage
Disadvantage
Changing
inventory levels
Changes in
human resources
are gradual, not
abrupt
production
changes
Varying
workforce size
by hiring or
layoffs
Avoids use of
Hiring, layoff,
other alternatives and training
costs
Inventory
holding costs;
Shortages may
result in lost
sales
Some
Comments
Applies mainly
to production,
not service
operations
Used where size
of labor pool is
large
Advantages/Disadvantages continued
Option
Advantage
Disadvantage Some
Comments
Varying
production rates
through overtime
or idle time
Matches seasonal
fluctuations
without
hiring/training
costs
Permits
flexibility and
smoothing of the
firm's output
Overtime
premiums, tired
workers, may not
meet demand
Allows
flexibility within
the aggregate
plan
Loss of quality
control; reduced
profits; loss of
future business
Applies mainly
in production
settings
Subcontracting
Advantages/Disadvantages continued
Option
Advantage
Disadvantage
Some
Comments
Using part-time
workers
Less costly and
more flexible
than full-time
workers
Good for
unskilled jobs in
areas with large
temporary labor
pools
Influencing
demand
Tries to use
excess capacity.
Discounts draw
new customers.
High
turnover/training
costs; quality
suffers;
scheduling
difficult
Uncertainty in
demand. Hard to
match demand to
supply exactly.
Creates
marketing ideas.
Overbooking
used in some
businesses.
Advantage/Disadvantage continued
Option
Advantage
Disadvantage
Back ordering
during highdemand periods
May avoid
Customer must
overtime. Keeps be willing to
capacity constant wait, but
goodwill is lost.
Counterseasonal Fully utilizes
May require
products and
resources; allows skills or
service mixing
stable workforce. equipment
outside a firm's
areas of
expertise.
Some
Comments
Many companies
backlog.
Risky finding
products or
services with
opposite demand
patterns.
The Extremes
Level
Strategy
Chase
Strategy
Production rate
is constant
Production
equals sales
forecast
Aggregate Planning Strategies

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
 Chase scheduling strategy
– Vary the amount of production to match (chase) the
sales forecast
– This requires changing the workforce (hiring & firing)
 Mixed strategy
– Combines 2 or more aggregate scheduling options
The Trial & Error 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, overtime,
outsourcing, or to inventory levels
Develop alternative plans, and examine
their total costs
The IDES Sales Forecast for 2003
Quarter 1
Unit Sales Forecast
For 2003
307,200
Quarter 2
379,200
Quarter 3
360,000
Quarter 4
489,600
Total
1,536,000
IDES Manufacturing Example

IDES Manufacturing wants to compare the
annual (year 2003) costs associated with
scheduling using the following three (3)
options:
 Option 1 – Maintain a constant work force
during the entire year (Level).
 Option 2 – Maintain the present work force of
150 and use overtime and sub-contracting as
needed (Mixed)
 Option 3 – Hire/layoff workers as needed to
produce the required output (Chase).
IDES Cost Information

Inventory Carrying Cost
(per quarter)
$ 0.50/unit
 Subcontracting cost
$ 7/unit
 Pay rate – regular time
$20/hr
 Pay rate – overtime
$30/hr
 Labor standard per unit
0.2 hrs
 Cost to increase production
$ 3/unit
 Cost to decrease production
$ 2/unit
 IDES has 0 units in inventory
 Each Quarter has 60 working days
 At end of 2002, IDES has 150 prod. workers
 IDES Policy – Maximum of 72,000 units/qtr produced
using overtime
Option 1 – Constant Workforce
without overtime or subcontracting

First, determine the number of workers
required to produce the units forecast for
2003.
 Ave. Prod/day = 1,536,000 = 6,400/day
240 days
 Then determine how many workers are
needed.
 Workers needed =
6,400/day
= 160
5 units/hr X 8 hrs
Option 1 Continued:
Calculate Inventory Carrying Costs
Qtr
Sales
Forecast
Inventory Ending
Change Inventory
1
Production
@ 6400/day
384,000
307,200
+76,800
76,800
2
384,000
379,200
+ 4,800
81,600
3
384,000
360,000
+24,000
105,600
4
384,000
489,600
-105,600
1,536,000
1,536,000
Total
0
264,000
Option 1 Continued:
Calculation of Annual Costs




Inventory carrying cost:
264,000 units X $0.50/unit =
Cost to increase capacity:
(384,000-360,000) units X $5/unit =
Regular time labor cost:
1,536,000 units X $4/unit =
Total Annual Cost for Option 1 =
$ 132,000
$ 120,000
$6,144,000
$6,396,000
Option 2 – Present Workforce (150) using
O/T & subcontracting
Qtr
Sales
Forecast
1
307,200
2
Inv
Change
End
Inv
360,000
+52,800
52,800
0
0
0
379,200
360,000
-19,200
33,600
0
0
0
3
360,000
360,000
0
33,600
0
0
0
4
489,600
360,000
-33,600
0
96,000
72,000
24,000
1,536,000
1,440,000
72,000
24,000
Tot
al
In-house
Production
Units
Req’d
0
O/T
Out
Source
Option 2 Continued:
Calculation of Annual Costs





Inventory Carrying Costs
120,000 units X $.50/unit =
$ 60,000
Regular time labor (150 workers)
$4/unit X 1,440,000 units =
$5,760,000
Overtime labor
$6/unit X 72,000 units =
$ 432,000
Out-sourcing
$7/unit X 24,000 units =
$ 168,000
Total Annual Costs for Option 2 = $6,420,000
Option 3 – Vary Production
(Workforce) to match Sales Forecast
Qtr
1
Sales
Beginning
Forecast
Capacity
307,200 360,000
Capacity
Change
Needed
-52,800
Cost of
Capacity
Change
$105,600
2
379,200
307,200
+72,000
216,000
3
360,000
379,200
-19,200
38,400
4
489,600
360,000
+129,600
388,800
Total
1,536,000
$748,800
Option 3 Continued
Calculation of Annual Costs

Regular time labor costs
1,536,000 units X $4/unit =
$6,144,000
 Capacity Change Costs =
$ 748,800
 Total Annual Cost - Option 3 = $6,892,800
Annual Cost Comparison of the
Aggregate Scheduling Strategies
Option
Annual Cost
1. Level – No use of O/T or
Outsourcing
2. Mixed – Present work
force w/ O/T & Outsourcing
$6,396,000
3. Chase – Vary Production
(workforce)
$6,892,800
$6,420,000
Homework Problem – Due at the
beginning of class Tuesday March 11
Use the Revised IDES Cost information
shown on the following two slides to
evaluate the following scheduling
options:
 Level Strategy
 Chase Strategy
 Maintain Present work force and use
overtime production and sub-contracting
as needed

The IDES Sales Forecast for 2003
Revised
Quarter 1
Unit Sales Forecast
For 2003
388,000
Quarter 2
440,000
Quarter 3
400,000
Quarter 4
500,000
Total
1,728,000
IDES Cost Information - Revised

Inventory Carrying Cost
(per quarter)
$ 0.75/unit
 Subcontracting cost
$ 7.50/unit
 Pay rate – regular time
$20/hr
 Pay rate – overtime
$30/hr
 Labor standard per unit
0.2 hrs
 Cost to increase production
$ 1.50/unit
 Cost to decrease production
$ 1/unit
 IDES has 0 units in inventory
 Each Quarter has 60 working days
 At end of 2000, IDES has 140 prod. workers
 IDES Policy – Maximum of 78,000 units/qtr produced
using overtime