[PPT]Production and Operations Management: …sureten/(aggregate planning)5.ppt · Web viewDisaggregating the Aggregate Plan Aggregate Planning Aggregate planning Intermediate-range

Aggregate Planning

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Aggregate Planning

• Aggregate planning– Intermediate-range capacity planning that

typically covers a time horizon of 2 to 18 months– Useful for organizations that experience

seasonal, or other variations in demand– Goal:

• Achieve a production plan that will effectively utilize the organizations’ resources to satisfy demand

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Sales and Operations Planning

• Some organizations use the term sales operations and planning rather than aggregate planning– Sales and operation planning

• Intermediate-range planning decisions to balance supply and demand, integrating financial and operations planning

• Since the plan affects functions throughout the organization, it is typically prepared with inputs from sales, finance, and operations

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Planning Levels

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Planning Tasks and Responsibilities

Planning Horizon

Shortrange

Intermediate range

Long range

Now 6 months 18 months

Master scheduling

Material requirements planning

Order schedulingWeekly workforce andcustomer scheduling

Daily workforce and customer scheduling

Process planning

Strategic capacity planning

Sales and operations (aggregate) planning

Longrange

Intermediaterange

Shortrange

ManufacturingServices

Sales plan Aggregate operations plan

Forecasting & demand management

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The Planning Sequence

Business Plan Establishes operationsand capacity strategies

Aggregate Plan Establishesoperations capacity

Master Schedule Establishes schedulesfor specific products

Corporatestrategies

and policies

Economic,competitiveand politicalconditions

Aggregate demandforecasts

Operations Planning Activities

• Long-range planning– Greater than one year planning horizon– Usually performed in annual increments

• Medium-range planning– Six to eighteen months – Usually with monthly or quarterly increments

• Short-range planning– One day to less than six months– Usually with weekly increments

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Aggregation

• The plan must be in units of measurement that can be understood by the firm’s non-operations personnel

• Aggregate units of output per month

• Dollar value of total monthly output

• Total output by factory

• Measures that relate to capacity such as labor hours

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Dealing with Variation

• Most organizations use rolling 3, 6, 9 and 12 month forecasts– Forecasts are updated periodically, rather than

relying on a once-a-year forecast

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Dealing with Variation

• Strategies to counter variation:– Maintain a certain amount of excess capacity to handle

increases in demand– Maintain a degree of flexibility in dealing with changes

• Hiring temporary workers• Using overtime

– Wait as long as possible before committing to a certain level of supply capacity• Schedule products or services with known demands first• Wait to schedule other products until their demands become less

uncertain

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Overview of Aggregate Planning

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Demand and Supply

• Aggregate planners are concerned with the– Demand quantity

• If demand exceeds capacity, attempt to achieve balance by altering capacity, demand, or both

– Timing of demand• Even if demand and capacity are approximately equal,

planners still often have to deal with uneven demand within the planning period

Aggregate Production Planning (APP)

Matches market demand to company resources Plans production 6 months to 18 months in

advance Expresses demand, resources, and capacity in

general terms Develops a strategy for economically meeting

demand Establishes a company-wide game plan for

allocating resources

Balancing Aggregate Demandand Aggregate Production Capacity

0

2000

4000

6000

8000

10000

Jan Feb Mar Apr May Jun

45005500

7000

10000

8000

6000

0

2000

4000

6000

8000

10000

Jan Feb Mar Apr May Jun

9000 90009900

88009500 9500

Suppose the figure to the right represents forecast demand in units

Now suppose this lower figure represents the aggregate capacity of the company to meet demand

What we want to do is balance out the production rate, workforce levels, and inventory to make these figures match up

Aggregate Plan: Relationships

AggregatePlan for

Production

DemandForecasts,

orders

MasterProduction

Schedule, and MRP systems

Detailed WorkSchedules

ExternalCapacity

Subcontractors

Inventory OnHand

Raw MaterialsAvailable

Work Force

Marketplaceand Demand

Research andTechnology

ProductDecisions

ProcessPlanning & Capacity

Decisions

Inputs and Outputs to APP

CompanyPolicies

StrategicObjectives

CapacityConstraints

Units or dollarssubcontracted,

backordered, or lost

Size ofWorkforce

Productionper month

(in units or $)

InventoryLevels

FinancialConstraints

DemandForecasts

AggregateProductionPlanning

Resources• Workforce/production rates• Facilities and equipment

Demand forecastPolicies

• Workforce changes• Subcontracting• Overtime• Inventory levels/changes• Back orders

Common unit for measuring outputs

Costs• Inventory carrying• Back orders• Hiring/firing• Overtime• Inventory changes• Subcontracting

Aggregate Planning Inputs

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Aggregate Planning Outputs

• Total cost of a plan• Projected levels of

– Inventory– Output (units completed per unit time)– Employment (workforce level-no.of workers)– Subcontracting levels (if any)– Backordering levels (if any)

• Meet demand• Use capacity efficiently• Meet inventory policy• Minimize total cost

Aggregate Planning Goals

Aggregate Planning Strategies

• Proactive– Alter demand to match capacity

• Reactive– Alter capacity to match demand

• Mixed– Some of each

Demand Management Options Shifting demand from peak to off-peak periods by

incentives, promotions, advertising campaigns, pricing (price elasticity important) etc.

Offering product or services with counterseasonal demand patterns (counterseasonal product mixing)

Backordering (orders are taken in one period and deliveries promised for a later period

Creation of new demand Partnering with suppliers to reduce information

distortion along the supply chain

Producing at a constant rate and using inventories to absorb fluctuations in demand ie. changing inventory levels

Varying work force size (hiring and firing workers) so that production matches demand

Varying production capacity by increasing or decreasing working hours (overtime or idle time)

Adjusting Capacity to Meet Demand (Supply Options) (1 of 2)

Using part-time workers to change production rateSubcontracting work to other firmsProviding the service or product at a later time

period (backordering)

Options of Adjusting Capacity to Meet Demand (2 of 2)

Strategy Details

Overtime & undertime - common when demand fluctuations are not extreme

Subcontracting - useful if supplier meets quality & time requirements

Part-time workers - feasible for unskilled jobs or if labor pool exists

Backordering - only works if customer is willing to wait for product/services

Capacity Options - Advantages and Disadvantages (1 of 4)

Option Advantage Disadvantage 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

Option Advantage Disadvantage SomeComments

Varyingproduction ratesthrough overtimeor idle time

Matches seasonalfluctuationswithouthiring/trainingcosts

Overtimepremiums, tiredworkers, may notmeet demand

Allowsflexibility withinthe aggregateplan

Subcontracting Permitsflexibility andsmoothing of thefirm's output

Loss of qualitycontrol; reducedprofits; loss offuture business

Applies mainlyin productionsettings

Advantages/Disadvantages (2 of 4)

Advantages/Disadvantages (3 of 4)

Option Advantage Disadvantage SomeComments

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.

Advantages/Disadvantages (4 of 4)

Option Advantage Disadvantage SomeComments

Back orderingduring high-demand periods

May avoidovertime. Keepscapacity constant

Customer mustbe willing towait, butgoodwill is lost.

Many companiesbackorder.

Counterseasonalproducts andservice mixing

Fully utilizesresources; allowsstable workforce.

May requireskills orequipmentoutside a firm'sareas ofexpertise.

Risky findingproducts orservices withopposite demandpatterns.

The Extremes

Level Strategy

Chase Strategy

Production equals

demand

Production rate is constant

Basic Aggregate Planning Strategies for Meeting Demand

Level capacity strategy: • Keeping work force constant and maintaining a steady rate

of regular-time output while meeting variations in demand by a combination of options (such as using inventories +overtime+part-time workers+backorders subcontracting)

Chase demand strategy: • Changing workforce levels so that production matches

demand (the planned output for a period is set at the expected demand for that period.)

Maintaining resources for high demand levels • Ensures high levels of customer service

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Chase Approach

• Capacities are adjusted to match demand requirements over the planning horizon– Advantages

• Investment in inventory is low• Labor utilization in high

– Disadvantages• The cost of adjusting output rates and/or workforce

levels

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Level Approach

• Capacities are kept constant over the planning horizon

• Advantages– Stable output rates and workforce

• Disadvantages– Greater inventory costs– Increased overtime and idle time– Resource utilizations vary over time

Level Production

Production

Demand

Uni

tsU

nits

TimeTime

Chase Demand

Production

Demand

Uni

ts

Time

Level Strategy: Forecast and Average Forecast Demand

0

10

20

30

40

50

60

70

Prod

uctio

n ra

te p

er w

orki

ng d

ay

Jan Feb Mar Apr May Jun

Forecast Demand

Level production using average monthly forecast demand

22 18 21 21 22 20

Level Strategy: Cumulative Demand Graph

Jan Feb Mar Apr May Jun

Cumulative forecast requirements

Cumulative level production using average monthly

forecast requirements

Reduction of inventory

Excess inventoryCum

ulat

ive D

eman

d (U

nits

)7,000

6,000

5,000

4,000

3,000

2,000

1,000

Graphical & charting techniques• Popular & easy-to-understand• Trial & error approach

Mathematical approaches• Linear programming • Transportation method • Linear decision rule (LDR)• Search decision rule (SDR)• Management coefficients model• Simulation models (Computerized models that can be tested under different scenarios

to identify acceptable solutions to problems

Aggregate Planning Methods

Summary of Planning TechniquesTechnique Solution Characteristics Graphical/charting Trial and

error Intuitively appealing, easy to understand; solution not necessarily optimal.

Linear programming

Optimizing Computerized; linear assumptions not always valid.

Linear decision rule

Optimizing Complex, requires considerable effort to obtain pertinent cost information and to construct model; cost assumptions not always valid.

Simulation Trial and error

Computerized models can be examined under a variety of conditions.

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Trial-and-Error Techniques

• Trial-and-error approaches consist of developing simple table or graphs that enable planners to visually compare projected demand requirements with existing capacity

• Alternatives are compared based on their total costs• Disadvantage of such an approach is that it does

not necessarily result in an optimal aggregate plan

1. Forecast demand for each period

2. Determine capacities (for regular time, overtime, subcontracting) for each period

3. Identify policies that are pertinent

4. Determine costs (labor, hiring/firing, holding etc.)

5. Develop alternative plans and costs

6. Select the best plan that satisfies objectives. Otherwise return to step 5.

Steps of Trial & Error Method

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Trial-and-Error Technique Assumptions

• The regular output capacity is the same in all periods• Cost is a linear function composed of unit cost and number of units• Plans are feasible• All costs are associated with a decision option can be represented

by a lump sum• Cost figures can be reasonably estimated and are constant for the

planning period• Inventories are built up and drawn down at a uniform rate

throughout each period• Backlogs are treated as if they exist the entire period

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Cumulative Graph

Cumulativeproduction

CumulativedemandC

umul

ativ

e ou

tput

/dem

and

Period

Inventory Build Up

Inventory Shortage

Aggregate Planning Using Pure Strategies- Example 1

(1 of 4)

Hiring cost = $100 per workerFiring cost = $500 per worker

Inventory carrying cost = $0.50 pound per quarterProduction per employee = 1,000 pounds per quarter

Beginning work force = 100 workers

QUARTER SALES FORECAST (LB)

Spring 80,000Summer 50,000Fall 120,000Winter 150,000

Example 1: Level Production Strategy (2 of 4)

QUARTER SALES FORECAST (LB)

Spring 80,000Summer 50,000Fall 120,000Winter 150,000

Level production

= 100,000 pounds

(50,000 + 120,000 + 150,000 + 80,000)4

Example 1:Level Production Strategy (3 of 4)

Spring 80,000 100,000 20,000Summer 50,000 100,000 70,000Fall 120,000 100,000 50,000Winter 150,000 100,000 0

Total 400,000 140,000

Cost = 140,000 pounds x 0.50 per pound = $70,000

SALES PRODUCTIONQUARTER FORECAST PLAN INVENTORY

Spring 80,000 80,000 80 0 20Summer 50,000 50,000 50 0 30Fall 120,000 120,000 120 70 0Winter 150,000 150,000 150 30 0

100 50

SALES PRODUCTION WORKERS WORKERS WORKERSQUARTER FORECAST PLAN NEEDED HIRED FIRED

Cost = (100 workers hired x $100) + (50 workers fired x $500)= $10,000 + 25,000 = $35,000

Example 1:Chase Demand Strategy (4 of 4)

Aggregate Planning: Example 2

Production per employee = 100 cases per monthWage rate = $10 per case for regular production

= $15 per case for overtime= $25 for subcontracting

Hiring cost = $1000 per workerFiring cost = $500 per worker

Inventory carrying cost = $1.00 case per monthBeginning work force = 10 workers

January 1000 July 500February 400 August 500March 400 September 1000April 400 October 1500May 400 November 2500June 400 December 3000

MONTH DEMAND (CASES) MONTH DEMAND (CASES)

Aggregate Planning:Example 3(1 of 8)

Materials $5/unitHolding costs $1/unit per mo.Marginal cost of stockout $1.25/unit per mo.Hiring and training cost $200/workerLayoff costs $250/workerLabor hours required 0.15 hrs/unitStraight time labor cost $8/hourBeginning inventory 250 unitsProductive hours/worker/day 7.25Paid straight hrs/day 8

Suppose we have the following unit demand and cost information:

Demand/mo Jan Feb Mar Apr May Jun

4500 5500 7000 10000 8000 6000

Jan Feb Mar Apr May JunDays/mo 22 19 21 21 22 20Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145Units/worker 1063.33 918.33 1015 1015 1063.33 966.67$/worker $1,408 1,216 1,344 1,344 1,408 1,280

Demand/mo Jan Feb Mar Apr May Jun4500 5500 7000 10000 8000 6000

Given the demand and cost information below, whatare the aggregate hours/worker/month, units/worker, and dollars/worker?

7.25x22

7.25/0.15=48.33 & 48.33x22=1063.3322x8hrsx$8=$1408

Example 3:Determining Output and Straight Labor Costs(2 of 8)

Example 3: Chase Strategy(Hiring & Firing to meet demand)(3 of 8)

JanDays/mo 22Hrs/worker/mo 159.5Units/worker 1,063.33$/worker $1,408

JanDemand 4,500Beg. inv. 250Net req. 4,250Req. workers 3.997HiredFired 3Workforce 4Ending inventory 0

Lets assume our current workforce is 7 workers.

First, calculate net requirements for production, or 4500-250=4250 units

Then, calculate number of workers needed to produce the net requirements, or 4250/1063.33=3.997 or 4 workers

Finally, determine the number of workers to hire/fire. In this case we only need 4 workers, we have 7, so 3 can be fired.

Jan Feb Mar Apr May JunDays/mo 22 19 21 21 22 20Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145Units/worker 1,063 918 1,015 1,015 1,063 967$/worker $1,408 1,216 1,344 1,344 1,408 1,280

Jan Feb Mar Apr May JunDemand 4,500 5,500 7,000 10,000 8,000 6,000Beg. inv. 250Net req. 4,250 5,500 7,000 10,000 8,000 6,000Req. workers 3.997 5.989 6.897 9.852 7.524 6.207Hired 2 1 3Fired 3 2 1Workforce 4 6 7 10 8 7Ending inventory 0 0 0 0 0 0

Below are the complete calculations for the remaining months in the six month planning horizon

Example 3 (4 of 8)

Jan Feb Mar Apr May JunDemand 4,500 5,500 7,000 10,000 8,000 6,000Beg. inv. 250Net req. 4,250 5,500 7,000 10,000 8,000 6,000Req. workers 3.997 5.989 6.897 9.852 7.524 6.207Hired 2 1 3Fired 3 2 1Workforce 4 6 7 10 8 7Ending inventory 0 0 0 0 0 0

Jan Feb Mar Apr May Jun CostsMaterial $21,250.00 $27,500.00 $35,000.00 $50,000.00 $40,000.00 $30,000.00 203,750.00Labor 5,627.59 7,282.76 9,268.97 13,241.38 10,593.10 7,944.83 53,958.62Hiring cost 400.00 200.00 600.00 1,200.00Firing cost 750.00 500.00 250.00 1,500.00

$260,408.62

Below are the complete calculations for the remaining months in the six month planning horizon with the other costs included

Example 3 (5 of 8)

Example 3: Level Workforce Strategy (Surplus and Shortage Allowed)(6 of 8)

JanDemand 4,500Beg. inv. 250Net req. 4,250Workers 6Production 6,380Ending inventory 2,130Surplus 2,130Shortage

Lets take the same problem as before but this time use the Level Workforce strategy

This time we will seek to use a workforce level of 6 workers

Jan Feb Mar Apr May JunDemand 4,500 5,500 7,000 10,000 8,000 6,000Beg. inv. 250 2,130 2,140 1,230 -2,680 -1,300Net req. 4,250 3,370 4,860 8,770 10,680 7,300Workers 6 6 6 6 6 6Production 6,380 5,510 6,090 6,090 6,380 5,800Ending inventory 2,130 2,140 1,230 -2,680 -1,300 -1,500Surplus 2,130 2,140 1,230Shortage 2,680 1,300 1,500

Note, if we recalculate this sheet with 7 workers we would have a surplus

Below are the complete calculations for the remaining months in the six month planning horizon

Example 3 (7 of 8)

Jan Feb Mar Apr May Jun4,500 5,500 7,000 10,000 8,000 6,000

250 2,130 10 -910 -3,910 -1,6204,250 3,370 4,860 8,770 10,680 7,300

6 6 6 6 6 66,380 5,510 6,090 6,090 6,380 5,8002,130 2,140 1,230 -2,680 -1,300 -1,5002,130 2,140 1,230

2,680 1,300 1,500

Jan Feb Mar Apr May Jun$8,448 $7,296 $8,064 $8,064 $8,448 $7,680 $48,000.0031,900 27,550 30,450 30,450 31,900 29,000 181,250.002,130 2,140 1,230 5,500.00

3,350 1,625 1,875 6,850.00

$241,600.00

Below are the complete calculations for the remaining months in the six month planning horizon with the other costs included

Note, total costs under this strategy are less than Chase at $260.408.62

LaborMaterialStorageStockout

Example 3 (8 of 8)

APP by Linear Programming

whereHt = # hired for period tFt = # fired for period tIt = inventory at end

of period tPt = units produced

in period tWt = workforce size

for period t

Minimize Z = $100 (H1 + H2 + H3 + H4)+ $500 (F1 + F2 + F3 + F4)+ $0.50 (I1 + I2 + I3 + I4)

Subject toP1 - I1 = 80,000 (1)

Demand I1 + P2 - I2 = 50,000 (2)constraints I2 + P3 - I3 = 120,000 (3)

I3 + P4 - I4 = 150,000 (4)Production 1000 W1 = P1 (5)constraints 1000 W2 = P2 (6)

1000 W3 = P3 (7)1000 W4 = P4 (8)

100 + H1 - F1 = W1 (9) Work force W1 + H2 - F2 = W2 (10) constraints W2 + H3 - F3 = W3 (11)

W3 + H4 - F4 = W4 (12)

APP by the Transportation Method

1 900 1000 100 5002 1500 1200 150 5003 1600 1300 200 5004 3000 1300 200 500

Regular production cost per unit $20Overtime production cost per unit $25Subcontracting cost per unit $28Inventory holding cost per unit per period $3Beginning inventory 300 units

EXPECTED REGULAR OVERTIME SUBCONTRACTQUARTER DEMAND CAPACITY CAPACITY CAPACITY

The Transportation TableauUnused

PERIOD OF PRODUCTION 1 2 3 4 Capacity Capacity

Beginning 0 3 6 9Inventory 300 — — — 300

Regular 600 300 100 — 1000

Overtime 100 100

Subcontract 500

Regular 1200 — — 1200

Overtime 150 150

Subcontract 250 250 500

Regular 1300 — 1300

Overtime 200 — 200

Subcontract 500 500

Regular 1300 1300

Overtime 200 200

Subcontract 500 500

Demand 900 1500 1600 3000 250

1

2

3

4

PERIOD OF USE

20 23 26 29

25 28 31 34

28 31 34 37

20 23 26

25 28 31

28 31 34

20 23

25 28

28 31

20

25

28

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Burruss’ Production Plan

1 900 1000 100 0 5002 1500 1200 150 250 6003 1600 1300 200 500 10004 3000 1300 200 500 0

Total 7000 4800 650 1250 2100

REGULAR SUB- ENDINGPERIOD DEMAND PRODUCTION OVERTIME CONTRACT INVENTORY

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Other Quantitative Techniques

Linear decision rule (LDR)

Search decision rule (SDR)

Management coefficients model

Hierarchical Planning ProcessItems

Product lines or families

Individual products

Components

Manufacturing operations

Resource Level

Plants

Individual machines

Critical work

centers

Production Planning

Capacity Planning

Resource requirements

plan

Rough-cut capacity

plan

Capacity requirements

plan

Input/ output control

Aggregate production

plan

Master production schedule

Material requirements

plan

Shop floor

schedule

All work

centers

Aggregate Plan to Master Schedule(Disaggregation)

AggregatePlanning

Disaggregation

MasterSchedule

• Master schedule: –The result of disaggregating an aggregate plan

–shows quantity and timing of specific end items needed to meet demand for a scheduled horizon.

• Rough-cut capacity planning: –Approximate balancing of capacity and demand to

test the feasibility of a master schedule.

Disaggregating the Aggregate Plan

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Master Scheduling

• The heart of production planning and control– It determines the quantity needed to meet demand from all

sources– It interfaces with

• Marketing• Capacity planning• Production planning• Distribution planning

– Provides senior management with the ability to determine whether the business plan and its strategic objectives will be achieved

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The Master Scheduler

• The master scheduler’s duties:– Evaluating the impact of new orders– Providing delivery dates for orders– Deals with problems

• Evaluating the impact of production or delivery delays• Revising master schedule when necessary because of

insufficient supplies or capacity• Bring instances of insufficient capacity to the attention of

relevant personnel so they can participate in resolving conflicts

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The Master Scheduling Process

Beginning inventory

Forecast

Customer orders

Inputs OutputsProjected inventory

Master production schedule

Uncommitted inventory

MasterProductionSchedule

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Master Scheduling Process• The master production schedule (MPS) is one of the primary outputs

of the master scheduling process– Once a tentative MPS has been developed, it must be validated

• Rough cut capacity planning (RCCP) is a tool used in the validation process– Approximate balancing of capacity and demand to test the feasibility of a

master schedule

– Involves checking the capacities of production and warehouse facilities, labor, and vendors to ensure no gross deficiencies exist that will render the MPS unworkable

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MPS – Forecasts and Customer Orders

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Projected On-hand Inventory

Projected on-handinventory

Inventory fromprevious week

Current week’srequirements

-=

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MPS - Projected On-hand Inventory

64 1 2 3 4 5 6 7 8Forecast 30 30 30 30 40 40 40 40Customer Orders (committed) 33 20 10 4 2Projected on-hand inventory 31 1 -29

JUNE JULY

Beginning Inventory

Customer orders are larger than forecast in week. Projected on hand inventory is 64-33=31

Forecast is larger than Customer orders in week 2. Projected on hand inventory is 31-30=1

Forecast is larger than Customer orders in week 3. Projected on hand inventory is 1-30=-29

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Determining MPS and Projected On Hand

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Adding MPS and Projected On Hand to the MPS

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Available to Promise

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Available-to-PromisePERIOD

ON-HAND = 50 1 2 3 4 5 6Forecast 100 100 100 100 100 100Customer ordersMaster production schedule 200 200 200Available to promise

PERIODON-HAND = 50 1 2 3 4 5 6Forecast 100 100 100 100 100 100Customer orders 90 120 130 70 20 10Master production schedule 200 200 200Available to promise 40 0 170

ATP in period 1 = (50 + 200) - (90 + 120) = 40ATP in period 3 = 200 - (130 + 70) = 0ATP in period 5 = 200 - (20 + 10) = 170

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Available-to-PromiseProduct Request

Is the product available at

this location?

Is an alternative product available

at an alternate location?

Is an alternative product available at this location?

Is this product available at a

different location?

Available-to-promise

Allocate inventory

Capable-to-promise date

Is the customer willing to wait for

the product?

Available-to-promise

Allocate inventory

Revise master schedule

Trigger production

Lose sale

Yes

No

Yes

No

Yes

No

Yes

No

Yes

No

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Time Fences

Time Fences – points in time that separate phases of a master schedule planninghorizon.

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Time Fences in MPS

Period

“frozen”(firm orfixed)

“slushy”somewhat

firm

“liquid”(open)

1 2 3 4 5 6 7 8 9

1. Most services can’t be inventoried2. Demand for services is difficult to predict3. Capacity availability is also difficult to predict4. Service capacity must be provided at the

appropriate place and time5. Labor is usually the most constraining resource

for services6. Labor flexibility can be an advantage in services

Aggregate Planning for Services

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Aggregate Planning in Services

• Hospitals:– Aggregate planning used to allocate funds, staff, and

supplies to meet the demands of patients for their medical services

• Airlines:– Aggregate planning in this environment is complex due to

the number of factors involved– Capacity decisions must take into account the percentage

of seats to be allocated to various fare classes in order to maximize profit or yield

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Aggregate Planning in Services

• Restaurants:– Aggregate planning in high-volume businesses is

directed toward smoothing the service rate, determining workforce size, and managing demand to match a fixed capacity

– Can use inventory; however, it is perishable

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Aggregate Planning in Services

• The resulting plan in services is a time-phased projection of service staff requirements

• Aggregate planning in manufacturing and services is similar, but there are some key differences related to:1. Demand for service can be difficult to predict2. Capacity availability can be difficult to predict3. Labor flexibility can be an advantage in services4. Services occur when they are rendered

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Yield Management

• Yield management– An approach to maximizing revenue by using a

strategy of variable pricing; prices are set relative to capacity availability• During periods of low demand, price discounts are

offered• During periods of peak demand, higher prices are

charged• Users of yield management include

– Airlines, restaurants, hotels, restaurants

Characteristics That Make Yield Management Work

Service or product can be sold in advance of consumption

Demand fluctuatesCapacity is relatively fixedDemand can be segmentedVariable costs are low and fixed costs are

high

Hotel: Single Price Level

$15 variable cost of room

$150 Price charged for room

Price

Sales

$sales = Net price * 50 rooms =150*50=$7500

Demand Curve

Passed up profit contributions

Money left on the table

Potential customers exist who are willing to pay more than the $15 variable cost

Some customers who paid $150 for the room were actually willing to pay more

$ Sales = $ 6,750

Hotel: Two Price Levels

$15 variable cost of room

Demand

Sales

$100Price #1

$200Price #2

Total sales =

1st net price *30 + 2nd net price *30

= $8100

Net prices are:Price #1 => $85Price #2 => $175

$Sales = $ 8,100

Yield Management

P(n < x) Cu

Cu + Co

where

n = number of no-showsx = number of rooms or seats overbooked

Cu = cost of underbooking; i.e., lost saleCo = cost of overbooking; i.e., replacement costP = probability

Yield Management

NO-SHOWS PROBABILITY

0 .151 .25

2 .303 .30

Yield Management

NO-SHOWS PROBABILITY P(N < X)

0 .15 .001 .25 .152 .30 .403 .30 .70

Expected number of no shows

0(.15) + 1(.25) + 2(.30) + 3(.30) = 1.75

Optimal probability of no-shows

P(n < x) = = .517Cu

Cu + Co

7575 + 70

.517

Yield Management

NO-SHOWSNO-SHOWS PROBABILITYPROBABILITY PP((NN < < XX))

00 .15.15 .00.0011 .25.25 .15.1522 .30.30 .40.4033 .30.30 .70.70

Expected number of no shows

0(.15) + 1(.25) + 2(.30) + 3(.30) = 1.75

Optimal probability of no-shows

P(n < x) = = .517Cu

Cu + Co

7575 + 70

.517.517

Cost of overbooking

[2(.15) + 1(.25)]$70 = $38.50 Cost of bumping customers(.30)$75 = $22.50 Lost revenue from no-shows

$61.00 Total cost of overbooking by2 rooms

Expected savings = ($131.225 - $61) = $70.25 a night