Chapter 13 – Aggregate
Planning
Operations Management
by
R. Dan Reid & Nada R. Sanders
4th Edition © Wiley 2010
© Wiley 2010
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Learning Objectives
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Explain business planning
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Explain sales and operations planning
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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
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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
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Level Aggregate Plans
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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
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Produces exactly what is needed each period
Sets labor/equipment capacity to satisfy period demands
Disadvantage- constantly changing short term capacity
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Level Plan Example
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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
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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
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Hybrid Aggregate Plans
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Uses a combination of options
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Options should be limited to facilitate execution
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May use a level workforce with overtime & temps
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May allow inventory buildup and some backordering
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May use short term sourcing
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Aggregate Planning Options
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Demand-based options
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Reactive: uses finished goods inventories and
backorders for fluctuations
Proactive: shifts the demand patterns to minimize
fluctuations e.g. early bird dinner prices at a restaurant
Capacity-based options
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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:
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Point of Departure
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Magnitude of change
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Current % of normal capacity
Options are different depending on present situation
Larger changes need more dramatic measures
Duration of change
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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
Step
Step
Step
1234-
Choose strategy: level, chase, or Hybrid
Determine the aggregate production rate
Calculate the size of the workforce
Test the plan as follows:
Calculate Inventory, expected hiring/firing, overtime needs
Calculate 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
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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
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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
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Options remain the same – level, chase,
and hybrid plans
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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
A
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
B
Cost Data
Regular time labor cost per hour
Overtime labor cost per hour
Subcontracting cost per unit (labor only)
Hiring cost per employee
Firing cost per employee
Capacity Data
Beginning workforce (employees)
Service standard per call (hours)
Regular time available per period (hours)
Overtime available per period (hours)
$8.00
$12.00
$60.00
$250.00
$150.00
60
4
160
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Demand Data (calls)
Period
Period
Period
Period
Period
Period
Period
Period
1
2
3
4
5
6
7
8
Total Number of Periods
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2400
1560
1200
2040
2760
1680
1320
2400
8
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Plan C – Level Aggregate Plan with
No Back Orders or Tangible Product
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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
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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
Nontangible Products Using Hiring
and Firing
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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
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The Aggregate plan must balance several
perspectives
Costs are important but so are:
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Customer service
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Operational effectiveness
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Workforce morale
A successful AP considers each of these factors
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Aggregate Planning within OM: How it all
fits together
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Aggregate planning determines the resources available to operations
to support the overall business plan. It is critical that accurate demand
forecasts be available (Ch 8) so that a reasonable production plan can
be developed. A company needs to determine the aggregate
production rate output required to determine the appropriate size of
the workforce.
After these determinations have been made, the company can
calculate its inventory levels, back-order levels, capacity requirements,
and customer service levels. If the plan requires seven-day-a-week
operations, appropriate staff schedules need to be developed (Ch 15).
The aggregate plan specifies the number of employees needed. This
allows company to determine how much equipment and workspace is
needed, as well as to provide the input needed for developing a
workplace layout (Ch 9) within the operations area. Aggregate
planning provides the resources needed by operations to achieve the
company’s strategic objective.
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Aggregate Planning Across the
Organization
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Aggregate planning, MPS, and rough-cut
capacity affection functional areas throughout
the organization
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Accounting is affected because aggregate plan
details the resources needed by operations
Marketing as the aggregate plan supports the
marketing plan
Information systems maintains the databases that
support demand forecasts and other such
information
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Chapter 13 Highlights
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Planning begins with the development of the
strategic business plan that provides company
direction & objectives for the next two to ten years.
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.
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Chapter 13 Highlights con’t
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Demand patterns can be smoothed through
pricing incentives, reduced prices for out-ofseason purchases, or nonprime service times.
The difference in aggregate planning for
companies that do not provide a tangible
product is that the option to use inventories
is not available
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Chapter 13 Homework Hints
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All problems are based on The BackPack Company.
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Problem 13.1: level strategy allowing backorders. Calculate
the production rate and workforce level. Develop the plan,
calculate the costs, and evaluate the strategy.
Problem 13.3-4: chase strategy. 3) Calculate the production
rate and workforce levels. 4) Develop the plan, calculate the
costs, and evaluate the strategy.
Problem 13.5: chase strategy with overtime. Calculate the
production rate and workforce levels. Develop the plan,
calculate the costs, and evaluate the strategy.