Department of Management

Unit Four

Operations Planning and Scheduling

4.1. Aggregate Production Planning

Aggregate planning is also called the production planis a process that determines the resource
capacity a firm will need to meet its demand over an intermediate time horizon—6 to 12 months
in the future. Within this time frame, it is usually not feasible to increase capacity by building
new facilities or purchasing new equipment; however, it is feasible to hire or lay off workers,
increase or reduce the workweek, add an extra shift, subcontract out work, use overtime, or build
up and deplete inventory levels.

The aggregate plan details the aggregate production rate and the size of the workforce, which
enables planners to determine the amount of inventory to be held; the amount of overtime or
under time authorized; any authorized subcontracting, hiring, or firing of employees; and back-
ordering of customer orders. The aggregate plan is usually updated and reevaluated monthly by
the operations group.

The term aggregate is used because the plans are developed for product lines or product
families, rather than individual products. An aggregate operations plan might specify how many
bicycles are to be produced but would not identify them by color, size, tires, or type of brakes.
Resource capacity is also expressed in aggregate terms, typically as labor or machine hours.
Labor hours would not be specified by type of labor, nor machine hours by type of machine. And
they may be given only for critical processes.

For services, capacity is often limited by space—number of airline seats, number of hotel rooms,
number of beds in a correctional facility. Time can also affect capacity. The number of customers
who can be served lunch in a restaurant is limited by the number of seats, as well as the number
of hours lunch is served. In some overcrowded schools, lunch begins at 10:00 A.M. so that all
students can be served by 2:00 P.M!

There are two objectives to sales and operations planning:

1) To establish a company-wide game plan for allocating resources, and
2) To develop an economic strategy for meeting demand.

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The aggregate plan should reflect company policy (such as avoiding layoffs, limiting inventory
levels, and maintaining a specified customer service level) and strategic objectives (such as
capturing a certain share of the market or achieving targeted levels of quality or profit). Other
inputs include financial constraints, demand forecasts (from sales), and capacity constraints
(from operations).

Given these inputs, the sales function develops a monthly sales plan.

Meeting Demand Strategies

An economic strategy for meeting demand can be attained by either:

A. Adjusting capacity or
B. Managing demand.
I. Strategies for Adjusting Capacity

If demand for a company’s products or services is stable over time, then the resources necessary
to meet demand are acquired and maintained over the time horizon of the plan, and minor
variations in demand are handled with overtime or under time. Aggregate planning becomes
more of a challenge when demand fluctuates over the planning horizon. For example, seasonal
demand patterns can be met by:
1) Producing at a constant rate and using inventory to absorb fluctuations in demand (level
production)
2) Hiring and firing workers to match demand (chase demand)
3) Maintaining resources for high-demand levels
4) Increasing or decreasing working hours (overtime and under time)
5) Subcontracting work to other firms
6) Using part-time workers
7) Providing the service or product at a later time period (backordering)

Strategies used to adjust capacity can be classified as: Pure and Mixedstrategies. When one of
the alternatives of capacity adjustment strategies is selected, a company is said to have a pure
strategy for meeting demand. When two or more are selected, a company has a mixed strategy.

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A. Level Production

The level production strategy sets production at a fixed rate (usually to meet average demand)
and uses inventory to absorb variations in demand. During periods of low demand,
overproduction is stored as inventory, to be depleted in periods of high demand. The cost of this
strategy is the cost of holding inventory, including the cost of obsolete or perishable items that
may have to be discarded.

B. Chase Demand

The chase demand strategy matches the production plan to the demand pattern and absorbs
variations in demand by hiring and firing workers. During periods of low demand, production is
cut back and workers are laid off. During periods of high demand, production is increased and
additional workers are hired. The cost of this strategy is the cost of hiring and firing workers.
This approach would not work for industries in which worker skills are scarce or competition for
labor is intense, but it can be quite cost-effective during periods of high unemployment or for
industries with low-skilled workers.

C. Peak Demand

Maintaining resources for peak demand levels ensures high levels of customer service but can
be very costly in terms of the investment in extra workers and machines that remain idle during
low-demand periods.

D. Overtime and Under time

Overtime and under time are common strategies when demand fluctuations are not extreme. A
competent staff is maintained, hiring and firing costs are avoided, and demand is met temporarily
without investing in permanent resources. Disadvantages include the premium paid for overtime
work, a tired and potentially less efficient workforce, and the possibility that overtime alone may
be insufficient to meet peak demand periods. Under time can be achieved by working fewer
hours during the day or fewer days per week. In addition, vacation time can be scheduled during
months of slow demand.

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E. Subcontracting

Subcontracting or outsourcing is a feasible alternative if a supplier can reliably meet quality and
time requirements. This is a common solution for component parts when demand exceeds
expectations for the final product. The subcontracting decision requires maintaining strong ties
with possible subcontractors and first-hand knowledge of their work. Disadvantages of
subcontracting include reduced profits, loss of control over production, long lead times, and the
potential that the subcontractor may become a future competitor.

F. Part-Time Workers

Using part-time workers is feasible for unskilled jobs or in areas with large temporary labor
pools (such as students, homemakers, or retirees). Part-time workers are less costly than full-time
workers—they receive no health-care or retirement benefits—and are more flexible—their hours
usually vary considerably. Part-time workers have been the mainstay of retail, fast-food, and
other services for some time and are becoming more accepted in manufacturing and government
jobs.

G. Backlogs, Backordering, and Lost Sales

Companies that offer customized products and services accept customer orders and fill them at a
later date. The accumulation of these orders creates a backlog that grows during periods of high
demand and is depleted during periods of low demand. The planned backlog is an important part
of the aggregate plan.
For make-to-stock companies, customers who request an item that is temporarily out-of-stock
may have the option of backordering the item. If the customer is unwilling to wait for the
backordered item, the sale will be lost. Although in general both backorders and lost sales should
be avoided, the aggregate plan may include an estimate of both. Backorders are added to the next
period’s requirements; lost sales are not.

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II. Strategies for Managing Demand

Aggregate planning can also involve proactive demand management. Strategies for managing
demand include:

 Shifting demand into other time periods with incentives, sales promotions, and
advertising campaigns;
 Offering products or services with countercyclical demand patterns; and
 Partnering with suppliers to reduce information distortion along the supply chain.

Winter coat specials in July, bathing-suit sales in January, early-bird discounts on dinner, lower
long-distance rates in the evenings, and getaway weekends at hotels during the off-season are all
attempts to shift demand into different time periods. Electric utilities are especially skilled at off-
peak pricing. Promotions can also be used to extend high demand into low-demand seasons.

Holiday gift buying is encouraged earlier each year, and beach resorts plan festivals in
September and October to extend the season. Successful demand management depends on
accurate forecasts of demand and accurate forecasts of the changes in demand brought about by
sales, promotions, and special offers.

For industries with extreme variations in demand, offering products or services with
countercyclical demand patterns helps smooth out resource requirements. This approach involves
examining the idleness of resources and creating a demand for those resources.

Quantitative Techniques for Aggregate Planning

One aggregate planning strategy is not always preferable to another. The most effective strategy
depends on the demand distribution, competitive position, and cost structure of a firm or product
line.

A. Pure Strategies

Solving aggregate planning problems involves formulating strategies for meeting demand,
constructing production plans from those strategies, determining the cost and feasibility of each
plan, and selecting the lowest cost plan from among the feasible alternatives.

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The effectiveness of the aggregate planning process is directly related to management’s

understanding of the cost variables involved and the reasonableness of the scenarios tested.
Example 4.1 compares the cost of two purestrategies: level production and chase demand.

Example 4.1 Aggregate Planning:Using Pure Strategies

The Good and Rich Candy Company makes a variety of candies in three factories worldwide. Its
line of chocolate candies exhibits a highly seasonal demand pattern, with peaks during the winter
months (for the holiday season and Valentine’s Day) and valleys during the summer months
(when chocolate tends to melt and customers are watching their weight). Given the following
costs and quarterly sales forecasts, determine whether (a) level production, or (b) chase demand
would more economically meet the demand for chocolate candies:

Solution

a. For the level production strategy, we first need to calculate average quarterly demand.

This becomes our planned production for each quarter. Since each worker can produce 1000
pounds a quarter, 100 workers will be needed each quarter to meet the production requirements
of 100,000 pounds. Production in excess of demand is stored in inventory, where it remains until
it is used to meet demand in a later period.

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Demand in excess of production is met by using inventory from the previous quarter. The
production plan and resulting inventory costs are as follows:

Cost of Level Production Strategy = (400,000 * $2.00) + (140,000 * $.50) = $870,000

b. For the chase demand strategy, production each quarter matches demand.

To accomplish this, workers are hired at a cost of $100 each and fired at a cost of $500 each.
Since each worker can produce 1000 pounds per quarter, we divide the quarterly sales forecast
by 1000 to determine the required workforce size each quarter. We begin with 100 workers and
hire and fire as needed. The production plan and resulting hiring and firing costs are given here.

Cost of Chase Demand Strategy = (400,000 * $2.00) + (100 * $100) + (50 * $500) = $835,000

Comparing the cost of level production with chase demand, we find that chase demand is the
best strategy for the Good and Rich line of candies.

Although chase demand is the better strategy for Good and Rich from an economic point of
view, it may seem unduly harsh on the company’s workforce. An example of a good “fit”
between a company’s chase demand strategy and the needs of the workforce is Hershey’s,
located in rural Pennsylvania, with a demand and cost structure much like that of Good and Rich.

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The location of the manufacturing facility is essential to the effectiveness of the company’s
production plan. During the winter, when demand for chocolate is high, the company hires
farmers from surrounding areas, who are idle at that time of year.
The farmers are let go during the spring and summer, when they are anxious to return to their
fields and the demand for chocolate falls. The plan is cost-effective, and the extra help is content
with the sporadic hiring and firing practices of the company.

B. Mixed Strategies

Most companies use mixed strategies for production planning. Mixed strategies can incorporate
management policies, such as “no more than x% of the workforce can be laid off in one quarter”
or “inventory levels cannot exceed x dollars.” They can also be adapted to the quirks of a
company or industry. For example, many industries that experience a slowdown during part of
the year may simply shut down manufacturing during the low-demand season and schedule
employee vacations during that time.
Example 1:

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Example 2

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Example 3

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Unit Four-Continued

4.2. Operations Scheduling

Detailed day-to-day planning of operations is called scheduling. Scheduling decisions allocate

available capacity or resources (equipment, labor and space) jobs, activities, tasks or customers
over time. Since scheduling is an allocation decisions, it uses the resources made available by
facilities decisions and aggregate planning. Therefore, scheduling is the last and most
constrained decision in the hierarchy of capacity planning decisions.

In practice, scheduling results in a time phased plan, or schedule, of activities. The schedule
indicates what is to be done, when, by whom, and with what equipment. Scheduling should be
differentiated from aggregate planning. Aggregate planning seeks to determine the resources
needed, while scheduling allocates the resources made available through aggregate planning in
the best manner to meet operations objectives.

Scheduling deals with questions such as

 Which work centers will do which job?

 When should an operation /job be started? When should it end?
 On which equipment should it be done, and by whom?
 What is the sequence in which jobs/operations need to be handled in facility or on
equipment?

Common dispatching or priority rules include the following:

1. First-come, First-Served: Jobs arriving at a work station or service center are processed as
soon as they arrive in the order of their arrival. This rule is used in operations in which
fairness may be a factor in customer service, such as waiting for a service in post office or for
an amusement park ride.
2. Shortest Processing Time. The job arriving at a workstation or service center that requires
the least amount of processing time is dispatched first, the job requiring second longest
amount of time, second and so on.
3. Earliest Due Date: The job arriving at a work station or service center with the earliest due
date is dispatched first, the next earliest second, and so on.

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4. CR (Critical Ratio): This is calculated by dividing due date to processing time. Jobs with
the smallest CR run first.
CR=Due date/Processing time

The following standard measures of schedule performance are used to evaluate priority rules:

1. Meeting due dates of customers or downstream operations.

2. Minimizing the flow time (the time a job spends in the process)
3. Minimizing work in process inventory
4. Minimizing idle time of machines or workers

Scheduling n Jobs on one Machine (n job one-machine problem: n/1)

Example:

Mike Morales is the supervisor of Legal Copy-Express, which provides copy services. Five
customers submitted their orders at the beginning of the week. Specific scheduling date is as
follows.

Job (In order of arrival) Processing time(Days) Due date(Days Hence)

A 3 5
B 4 6
C 2 7
D 6 9
E 1 2

All orders require the use of the only color copy machine available; Morales must decide on the
processing sequence for the five orders. The evaluation criterion is minimum flow time. Suppose
that Morales decides to use the FCFS rule in an attempt to make Legal Copy-Express appear fair
to its customers.

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Solution

FCFS Rule: The FCFS rule results in the following flow times:

FCFS Schedule

Job Sequence Processing time Flow time(Days) Due Date Days late
(Days) (1) (2) (Days Hence) (3) (2-3)
A 3 3 5 0
B 4 7 6 1
C 2 9 7 2
D 6 15 9 6
E 1 16 2 14

Total flow time = 3+7+9+15+16= 50 days

Mean flow time = 50/5 = 10 days

Comparing the due date of each job with its flow time, we observe that only job A will be on
time. Jobs B, C, D, and E will be late by 1, 2, 6, and 14 days respectively. On average, a job will
be late by (0+1+2+6+14)/5 = 4.6 days.

Solution

SOT (SPT) Rule: Let’s now consider the SOT rule. Here Morales gives the highest priority to the
order that has the shortest processing time. The resulting flow times are

SOT (SPT) Schedule

Job Sequence Processing time Flow time(Days) Due Date Days late
(Days) (1) (2) (Days Hence) (3) (2-3)
E 1 1 2 0
C 2 3 7 0
A 3 6 5 1
B 4 10 6 4
D 6 16 9 7

Total flow time = 1+3+6+10+16 = 36 days

Mean flow time = 36/5 = 7.2 days

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SOT (SPT) results in a lower average flow time than the FCFS rule. In addition, Jobs E and C
will be ready before the due date, and Jobs A is late by only one day. On average, a job will be
late by (0+0+1+4+7)/5 = 2.4 days.

Solution

EDD Rule: If Morales decides to use the EDD rule, the resulting schedule is

EDD Schedule

Job Sequence Processing time Flow time(Days) Due Date Days late
(Days) (1) (2) (Days Hence) (3) (2-3)
E 1 1 2 0
A 3 4 5 0
B 4 8 6 2
C 2 10 7 3
D 6 16 9 7

Total completion time = 1+4+8+10+16 = 39 days

Mean flow time = 39/5 =7.8 days

In this case only job E will be on time. On average, a job will be late by (0+0+2+3+7)/5=2.4
days.

CR Rule: If Morales decides to use the CR rule, the resulting schedule is

The sequence of jobs according to CR rule is B-D-A-E-C

CR Schedule

Job Sequence Processing time Flow time(Days) Due Date Days late
(Days) (1) (2) (Days Hence) (3) (2-3)
B 4 4 6 0
D 6 10 9 1
A 3 13 5 8
E 1 14 2 12
C 2 16 7 9

Total completion time 57 days

Mean flow time =57 days/5= 11.4 days

Average job lateness = 30/5 = 6 days

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Comparision of Priority Rules

Here are some of the results summarized for the rules that Morales examined:

Scheduling Total flowtime Mean flow time Average Lateness

Rule (Days) (Days) (Days)
FCFS 50 10 4.6
SPT/SOT 36 7.2 2.4
EDD 39 7.8 2.4
CR 57 11.4 6

Here, SPT rule is better than the other rulesinterms of mean flow time. Moreover it can be shown
mathematically that the SOT rule yields an optimal solution in the n/1 case for mean waiting
time and average lateness as well.

Sequencing Jobs through Two Serial Processes

Since few factories consist of just one process, we might wonder if techniques exist that will
produce an optimal sequence for any number of jobs processed through more than one machine
or process. Johnson’s rule finds the fastest way to process a series of jobs through a two-step
system in which every job follows the same sequence through two processes. Based on a
variation of the SPT rule, it requires that the sequence be “mapped out” to determine the final
completion time, or make span, for the set of jobs. The procedure is as follows:
1. List the jobs and their times at each work center
2. Select the job with the smallest processing time at either process. If that time occurs at
process 1, schedule that job first, if the smallest time occurs at process 2, schedule the job
from last.

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Example

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