1 Operations Management Aggregate Planning. 2 Anheuser-Busch Anheuser-Busch produces nearly 40% of the beer consumed in the U.S. Matches fluctuating demand.

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Operations Management

Aggregate Planning

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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

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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)

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Aggregate Planning Goals

Meet demandUse capacity

efficientlyMeet inventory

policyMinimize cost

Labor Inventory Plant & equipment Subcontract

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Aggregate Planning Variables

Production rate

Labor levels

Inventory levels

Overtime work

Subcontracting

rates

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Planning Horizons

Today 3 Months 1 year 5 years

Planning Horizon

Short-range plansJob assignmentsOrderingJob schedulingDispatching

Intermediate-range plansSales planningProduction planning and budgetingSetting employment, inventory, subcontracting levelsAnalyzing operating plans

Long-range plansR&DNew product plansCapital expensesFacility location, expansion

Responsible: Operations managers, supervisors, foremen

Responsible: Operations managers

Responsible: Top executives

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Relationships of the Aggregate Plan

AggregatePlan for

Production

DemandForecasts,

orders

Master ProductionSchedule

MRP system

ExternalCapacity

Subcontractors

Inventory OnHand

Raw MaterialsAvailable

Work Force

Marketplaceand Demand

Research andTechnology

ProductDecisions

ProcessPlanning & Capacity

Decisions

Detailed WorkSchedules

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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

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Aggregate Planning StrategiesPure Strategies

Demand Options — change

demand:

influencing demand

backordering during high demand periods

Counter seasonal product mixing

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Aggregate Scheduling Options - Advantages and Disadvantages

Option AdvantageDisadvantage SomeComments

Changinginventory levels

Changes inhuman resourcesare gradual, notabruptproductionchanges

Inventoryholding costs;Shortages mayresult in lostsales

Applies mainlyto production,not service,operations

Varyingworkforce sizeby hiring orlayoffs

Avoids use ofother alternatives

Hiring, layoff,and trainingcosts

Used where sizeof labor pool islarge

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Option AdvantageDisadvantageSomeComments

Varyingproduction ratesthrough overtimeor idle time

Matches seasonalfluctuationswithouthiring/trainingcosts

Overtimepremiums, tiredworkers, may notmeet demand

Allowsflexibility withinthe aggregateplan

Subcontracting Permitsflexibility and

smoothing of thefirm's output

Loss of qualitycontrol; reducedprofits; loss offuture business

Applies mainlyin productionsettings

Advantages/Disadvantages - Continued

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Advantages/Disadvantages - Continued

Option Advantage DisadvantageSomeComments

Using part-timeworkers

Less costly andmore flexiblethan full-timeworkers

Highturnover/trainingcosts; qualitysuffers;schedulingdifficult

Good forunskilled jobs inareas with largetemporary laborpools

Influencingdemand

Tries to useexcess capacity.Discounts drawnew customers.

Uncertainty indemand. Hard tomatch demand tosupply exactly.

Createsmarketing ideas.Overbookingused in somebusinesses.

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Advantage/Disadvantage - Continued

Option Advantage Disadvantage SomeComments

Back orderingduring high-demand periods

May avoidovertime. Keepscapacity constant

Customer mustbe willing towait, but

goodwill is lost.

Many companiesbackorder.

Counterseasonalproducts andservice mixing

Fully utilizesresources; allowsstable workforce.

May requireskills orequipmentoutside a firm'sareas ofexpertise.

Risky findingproducts orservices withopposite demandpatterns.

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The Extremes

Level Strategy

Chase Strategy

Production equals

demand

Production rate is constant

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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

Aggregate Planning Strategies

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Graphical & charting techniques Popular & easy-to-understand

Trial & error approach

Mathematical approaches Transportation method

Linear decision rule

Management coefficients model

Simulation

Aggregate Planning Methods

OM Session 21: Bishal Shrestha 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

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Forecast and Average Forecast Demand

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Forecast Demand

Level production using average monthly forecast demand

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AP - ExampleMary 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

July Aug Sep Oct Nov Dec

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