Chapter 14. Aggregate Sales & Operations Planning

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Chapter 14. Aggregate Sales Operations Planning

• Medium (intermediate) range operations planning
• To meet the demand at a reasonable cost (to
  balance demand and supply)
• To effectively allocate firms resources
  (optimize)

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The Aggregate Operations Plan

• Product group or broad category, hence the term
  Aggregate (Aggregation)
• Main purpose Specify the optimal combination of
• production rate (units completed per unit of
  time)
• workforce level (number of workers)
• inventory on hand (inventory carried from
  previous period)
• This planning is done over an intermediate-range
  planning period of 3 to 18 months, the most
  common planning horizon is 12 months
• The plan needs to be updated at least quarterly
  or monthly
• Demand forecast is the key input.
• The most critical input to (any) planning
  process.

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Potentially Conflicting Objectives in Aggregate
Planning

• Minimize Costs or Maximize Profits
• Maximize customer service
• Minimize inventory
• Minimize changes in production rate
• Minimize changes in the staffing levels
• Maximize plant utilization

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Key Strategies for meeting demand

• Chase match the production rate to the order
  rate by hiring/firing as the order rate varies
• Stable workforce variable work hours. Vary
  output by over/under time, flexible schedules
• Level - stable workforce working at a constant
  rate use inventory/shortages/backordering to
  meet the demand
• Mix strategy two or more of the above in a more
  complex approach
• Outsourcing (subcontracting) can also be used to
  manage demand fluctuations

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Relevant Costs

• Generally the following are the most common
  relevant costs
• Production costs
• Costs associated with changing production rates
• Inventory holding costs
• Backordering costs

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Basics an example
Excel time
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Developing an Aggregate Plan

• Aggregate plans are done at an overview level and
  are not intended to incorporate all aspects of
  daily operational details.
• The period-to-period sales, inventory-production
  relationships must balance.
• Simple balance equation
• Supply Demand
• It-1 Pt Dt It
• This says that total product available in period
  t is either sold or put into ending inventory.
• More realistic balance equation could include
  backorders and subcontracting (if applicable).
• Various production, overtime, subcontracting
  limitations must be acknowledged.
• Consider the following mini-case study

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A simple aggregate plan

• Given the demand and relevant costs develop the
  lowest cost production plan.
• Demand per month, January through December
• 988, 800, 725, 538, 675, 775, 913, 1075,
  913, 788, 713, 850
• The variable production cost is estimated to be
  10/unit.
• The production change cost (increase or decrease
  from month to month) is 2 per unit.
• This cost captures (estimates) the hiring and
  layoff costs.
• The backorder cost is 5 per unit per month and
  the inventory cost is 1 per unit per month (use
  ending inventories for costing).
• The maximum production capacity is 1000 units per
  month.
• There is no subcontracting option.
• At the end of period 12 (December) there should
  not be any inventory or backorders.
• 12 month total production must equal to the 12
  month total demand. Hence, supply demand, but
  can we do it at minimum cost!
• Excel time!