Sales & Operations Planning

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 Overview

● Production-Planning Hierarchy
● Aggregate Planning
● Master Production Scheduling
● Types of Production-Planning and Control Systems
● Wrap-Up: What World-Class Companies Do

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 Production Planning Hierarchy

Long-Range Capacity Planning

Aggregate Planning

Master Production Scheduling

Production Planning and Control Systems

Pond Draining Push Pull Focusing on

Systems Systems Systems Bottlenecks

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 Production
Production Planning
Planning Horizons
Horizons

Long-Range
Long-Range Capacity Planning
(years)

Medium-Range
Aggregate Planning
(6-18 months)
Short-Range
Master Production Scheduling
(weeks)

Production Planning and Control Systems Very-Short-Range

(hours - days)

Pond Draining Push Pull Focusing on

Systems Systems Systems Bottlenecks
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 Production
Production Planning:
Planning: Units
Units of
of Measure
Measure

Entire
Long-Range Capacity Planning
Product Line

Product
Aggregate Planning
Family
Specific
Master Production Scheduling
Product Model

Production Planning and Control Systems Labor, Materials,

Machines

Pond Draining Push Pull Focusing on

Systems Systems Systems Bottlenecks
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 Capacity Planning, Aggregate Planning, Master Schedule, and Short-Term
Scheduling

Capacity Planning
1. Facility Size Long-term
2. Equipment Procurement

Aggregate Planning
1. Facility Utilization Intermediate-term
2. Personnel needs
3. Subcontracting

Master Schedule
1. MRP Intermediate-term
2. Disaggregation of master plan

Short-term Scheduling
1. Work center loading Short-term
2. Job sequencing
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 Relationships Between OM Elements

Marketplace Research and

and Demand Technology Work Force

Product
Decisions Raw Materials
Available

Process
Planning & Inventory
Decisions On Hand

External
Demand Aggregate Capacity
Forecasts Plan for
, Production
orders Plant
Master Capacity
Detailed Work
Production Schedules Priority
Schedule Planning &
Scheduling
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 Hierarchical Production Planning

Decision Level Decision Process Forecasts needed

Allocates Annual demand by
production
Corporate item and by region
among plants

Determines Monthly demand

Plant manager seasonal plan by for 15 months by
product type product type

Determines monthly Monthly demand

Shop item production for 5 months by
superintendent schedules item
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Aggregate Planning

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 Why Aggregate Planning Is Necessary

● Fully load facilities and minimize overloading and

underloading
● Make sure enough capacity available to satisfy
expected demand
● Plan for the orderly and systematic change of
production capacity to meet the peaks and valleys of
expected customer demand
● Get the most output for the amount of resources
available

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 Inputs

● A forecast of aggregate demand covering the selected

planning horizon (6-18 months)
● The alternative means available to adjust short- to
medium-term capacity, to what extent each
alternative could impact capacity and the related costs
● The current status of the system in terms of
workforce level, inventory level and production rate

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 Outputs

● A production plan: aggregate decisions for each

period in the planning horizon about
●
workforce level
●
inventory level
●
production rate
● Projected costs if the production plan was
implemented

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 Medium-Term Capacity Adjustments

● Workforce level
●
Hire or layoff full-time workers
●
Hire or layoff part-time workers
●
Hire or layoff contract workers
● Utilization of the work force
●
Overtime
●
Idle time (undertime)
●
Reduce hours worked
● . . . more

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 Medium-Term Capacity Adjustments

● Inventory level
●
Finished goods inventory
●
Backorders/lost sales
● Subcontract

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 Approaches

● Informal or Trial-and-Error Approach

● Mathematically Optimal Approaches
●
Linear Programming
●
Linear Decision Rules
● Computer Search
● Heuristics

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 Comparison of Aggregate Planning Methods

Method Advantages Limitations

Graphical ● Simple, easy to use and understand ● Many solutions; solution need not
be optimal

Linear ● Provides optimal solution ● Mathematical functions must be

linear, and deterministic -- not

Popular in many industries
Programming
●

● Sensitivity & dual analysis provide necessarily a realistic assumption

useful information
● Sensitivity & dual analysis provide
useful information
● Constraints readily added

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 Comparison of Aggregate Planning Methods

Method Advantages Limitations

Linear Decision ● Provide optimal solution ● Incorporates some non-standard costs
Handle non-deterministic Skilled personal required
Rules
● ●

demand ● Quadratic model not always realistic

● Values of variables are unconstrained
● Feasible solution is optimal if it exists
- not guaranteed

Management ● Simple, easy to use and

understand
● Solution need not be optimal
Assumes past decisions are good
Coefficients
●

● Attempts to duplicate ● Built on individual’s invalidate model

Model manager’s decision-making
process
● Simplest, least disruptive,
easiest to implement

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 Comparison of Aggregate Planning Methods

Method Advantages Limitations

Simulation ● Places no restrictions on
mathematical structure or cost
● No optimal solution guaranteed
● Often a long, costly, process
functions
● Can test many relationships

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 Pure Strategies for the Informal Approach

● Matching Demand
● Level Capacity
●
Buffering with inventory
●
Buffering with backlog
●
Buffering with overtime or subcontracting

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 Matching Demand Strategy

● Capacity (Production) in each time period is varied to

exactly match the forecasted aggregate demand in
that time period
● Capacity is varied by changing the workforce level
● Finished-goods inventories are minimal
● Labor and materials costs tend to be high due to the
frequent changes

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 Developing and Evaluating
the Matching Production Plan
● Production rate is dictated by the forecasted
aggregate demand
● Convert the forecasted aggregate demand into the
required workforce level using production time
information
● The primary costs of this strategy are the costs of
changing workforce levels from period to period, i.e.,
hirings and layoffs

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 Level Capacity Strategy

● Capacity (production rate) is held level (constant)

over the planning horizon
● The difference between the constant production rate
and the demand rate is made up (buffered) by
inventory, backlog, overtime, part-time labor and/or
subcontracting

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 Developing and Evaluating
the Level Production Plan
● Assume that the amount produced each period is
constant, no hirings or layoffs
● The gap between the amount planned to be produced
and the forecasted demand is filled with either
inventory or backorders, i.e., no overtime, no idle
time, no subcontracting
● . . . more

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 Developing and Evaluating
the Level Production Plan
● The primary costs of this strategy are inventory
carrying and backlogging costs
● Period-ending inventories or backlogs are determined
using the inventory balance equation:

EIt = EIt-1 + (Pt - Dt )

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 Aggregate Plans for Services

● For standardized services, aggregate planning may be

simpler than in systems that produce products
● For customized services,
●
there may be difficulty in specifying the nature and
extent of services to be performed for each
customer
●
customer may be an integral part of the production
system
● Absence of finished-goods inventories as a buffer
between system capacity and customer demand

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 Preemptive Tactics

● There may be ways to manage the extremes of

demand:
●
Discount prices during the valleys.... have a sale
●
Peak-load pricing during the highs .... electric
utilities, Nucor

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 Aggregate Planning Example

A small manufacturing company with 200 employees produces

umbrellas. The company produces the following three product lines:
1) the Executive Line, 2) the Durable Line and 3) the Compact line,
as shown in the below

Compact
Line
Executive Durable
Line 27
Line
 Aggregate Planning Example:
Demand for Executive Umbrellas

10000
10000
8000 Number of working days:
8000 7000 Jan: 22
6000
6000 5500 Feb: 19
4500 Mar: 21
4000 Apr: 21
May: 22
2000
Jun: 20
0
Jan Fe b Ma r Apr Ma y J un

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 Aggregate Planning Example:
Cost Information for Executive Umbrellas

Materials $5.00 /unit

Holding costs $1.00 /unit/month
Marginal cost of stockout $1.25 /unit/month
Hiring & training cost $200.00 /worker
Layoff costs $250.00 /worker
Labor hours required 0.15 hrs/unit

Straight time labor cost $8.00 /hr

Beginning inventory 250 units
Productive hours 7.25 hrs/worker/day
Paid straight hours 8 hrs/day
Beginning # of w orkers 7 workers

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 Aggregate Planning Example:
Determining Straight Labor Costs and Output for Executive Umbrellas

Jan Feb M ar Apr M ay Jun

Days/mo 22 19 21 21 22 20
Hrs/worker/mo 1 5 9 .5 1 3 7.75 1 52 .25 1 5 2 .2 5 159 .5 145
Units/worker 1 06 3.33 9 1 8.33 101 5 1 01 5 10 6 3 .3 3 96 6 .6 7
$ /wo rker $ 1,4 08 1 ,2 16 1,34 4 1,3 4 4 1,40 8 1 ,28 0

January
159.5 = 22 [days/month] * 7.25 [productive hrs/worker]
1063.33 = 159.5 [hrs/worker/month] / .15 [hrs/unit]
$1,408 = 8 [$/hr] * 8 [paid hrs/day] * 22 [days/month]

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 Aggregate Planning Example:
Determining Straight Labor Costs and Output for Executive Umbrellas

A g g r e g a te P la n n in g P r o b le m
Ja n Feb Mar Apr May Jun
D a y s/ m o n th 22 19 21 21 22 20
H r s / w o r k e r / m o n th 160 138 152 152 160 145
U n i ts/ w o r k e r 1 ,06 3 918 1 ,0 1 5 1 ,0 1 5 1 ,0 6 3 967
L a b o r c o st/ w o r k e $r 1 , 4 0 8 . 0$01 , 2 1 6 . 0$01 , 3 4 4 . 0$01 , 3 4 4 . 0$01 , 4 0 8 . 0 $0 1 , 2 8 0 . 0 0

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 Aggregate Planning Example
Chase Strategy for Executive Umbrellas

Jan • Objective: Adjust workforce level so as to

Days/mo 22 eliminate the need to carry inventory from
Hrs/worker/mo 159.5 period to period
Units/worker 1,063.33
$/worker $1,408

• 4,500 units is the demand in January (any

Jan combination of firm orders and forecast
Demand 4,500 • 250 is the starting inventory position
Beg. inv. 250 • 4,250 = 4,500 – 250
Net req. 4,250 • 3.997 = 4,250 / 1,063.33
Req. workers 3.997 • 7 = workforce level at the beginning of
Hired January
Fired 3 • 3 = 7 – 4 = workers fired
Workforce 4 • 4 = workforce level at end of January
Ending inventory 0 • 0 = ending inventory level
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 Aggregate Planning Example
Chase Strategy for Executive Umbrellas

C h a s e S tra te g y
Ja n Feb Mar Apr May Jun
De m a nd 4 ,5 0 0 5 ,5 0 0 7 ,0 0 0 1 0 ,0 0 0 8,000 6 ,0 0 0
B e g in n in g in v e n to ry 250 0 0 0 0 0
N e t re q u ire m e n ts 4 ,2 5 0 5 ,5 0 0 7 ,0 0 0 1 0 ,0 0 0 8,000 6 ,0 0 0
B e g in n in g # o f w o rk e rs 7 4 6 7 10 8
R e q u i re d w o rk e rs 4 6 7 10 8 6
W o rk fo rc e a d ju stm e n t -3 2 1 3 -2 -1
P ro d u c tio n q u a n tity 4 ,2 5 0 5 ,5 0 0 7 ,0 0 0 1 0 ,0 0 0 8,000 6 ,0 0 0
E n d i n g in v e n to ry 0 0 0 0 0 0

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 Aggregate Planning Example
Chase Strategy for Executive Umbrellas
C h a s e S tr a te g y C o s ts
Ja n Feb Mar Apr May Jun
M a te r ia l c o st $ 2 1 , 2 5 0$. 20 70 , 5 0 0$. 03 50 , 0 0 0$. 05 0 , 0 0 0$. 04 0 , 0 0 0 $. 0300 , 0 0 0$. 20 0 3 , 7 5 0 . 0 0
L a b o r c o st $ 5 , 6 2 8 . $0 70 , 2 8 3 . $0 09 , 2 6 9 $. 0103 , 2 4 2$. 01 0 , 5 9 4 . $0 70 , 9 4 5 . 0$ 50 3 , 9 6 1 . 0 0
H irin g c o st $ 0 . 0 0 $ 4 0 0 . 0 0$ 2 0 0 . 0 0$ 6 0 0 . 0 0 $ 0 . 0 0 $ 0 . 0 0 $ 1 , 2 0 0 . 0 0
F irin g c o st $ 7 5 0 . 0 0 $ 0 . 0 0 $ 0 . 0 0 $ 0 . 0 0 $ 5 0 0 . 0 0 $ 2 5 0 . 0 0$ 1 , 5 0 0 . 0 0
I n v e n t o r y h o l d i n g c o $s 0t . 0 0 $ 0 . 0 0 $ 0 . 0 0 $ 0 . 0 0 $ 0 . 0 0 $ 0 . 0 0 $ 0 . 0 0
I n v e n t o r y s to c k o u t c o$ s0t. 0 0 $ 0 . 0 0 $ 0 . 0 0 $ 0 . 0 0 $ 0 . 0 0 $ 0 . 0 0 $ 0 . 0 0

T O T A L$ 2: 6 0 , 4 1 1 . 0 0

January costs: $21,250.00 = 4,250 [units] * $5 [$/unit]

$ 5,627.59 = 3.997 [workers] * 1,408 [$/worker]
$ 750.00 = 3 [workers fired] * 250 [$/worker fired]
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 Aggregate Planning Example
Level Strategy for Executive Umbrellas

Jan
Demand 4,5 00 • Objective: Adjust inventory
level so as to eliminate the
Beg. inv. 2 50 need to hire or fire workers
Net req. 4,2 50 from period to period
• Assume that January is started
W o rkers 6 with 6 employees
P ro ductio n 6,3 80 • 6,380 = 6 [employees] *
1,063.33 [units/worker]
Ending inventory 2,1 30 • 2,130 = 6,380 – 4,250 (surplus)
Surplus 2,1 30
Shortage

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 Aggregate Planning Example
Level Strategy for Executive Umbrellas

L e v e l C a p a c it y S t r a t e g y
Ja n Feb Mar Apr May Jun
Dem and 4 ,5 0 0 5 ,5 0 0 7 ,0 0 0 1 0 ,0 0 0 8 ,0 0 0 6 ,0 0 0
B e g i n n i n g i n v e n to r y 2 5 0 2 ,1 3 0 2 ,1 4 0 1 ,2 3 0 -2 , 6 8 0 -4 , 3 0 0
N e t r e q u i r e m e n ts 4 ,2 5 0 3 ,3 7 0 4 ,8 6 0 8 ,7 7 0 1 0 ,6 8 0 1 0 ,3 0 0
B e g i n n i n g # o f w o r k e r s6 6 6 6 6 6
R e q u ire d w o rk e rs 4 4 5 9 10 11
W o r k fo r c e a d ju stm e n t 0 0 0 0 0 0
P r o d u c ti o n q u a n ti ty 6 , 3 8 0 5 ,5 1 0 6 ,0 9 0 6 ,0 9 0 6 ,3 8 0 5 ,8 0 0
E n d in g in v e n to r y 2 ,1 3 0 2 ,1 4 0 1 , 2 3 0 -2 , 6 8 0 -4 , 3 0 0 -4 , 5 0 0

36
 Aggregate Planning Example
Level Strategy for Executive Umbrellas

L e v e l C a p a c it y S t r a t e g y C o s t s
Jan Feb Mar Apr M ay Jun T o ta l
M a te r i a l c o st $ 3 1 , 9 0 0$ .2070 , 5 5 0$ .3000, 4 5 0$ .30 00, 4 5 0$ .30 10, 9 0 0$. 20 90 , 0 0 0$ .1080 1 , 2 5 0 . 0 0
L a b o r c o st $ 8 , 4 4 8 .$070 , 2 9 6 .$080 , 0 6 4 .$080, 0 6 4 .$0 80, 4 4 8 . $0 70 , 6 8 0 .$0 40 8 , 0 0 0 . 0 0
H irin g c o st $ 0 .0 0 $ 0 .0 0 $ 0 .0 0 $ 0 .0 0 $ 0 .0 0 $ 0 .0 0 $ 0 .0 0
F irin g c o st $ 0 .0 0 $ 0 .0 0 $ 0 .0 0 $ 0 .0 0 $ 0 .0 0 $ 0 .0 0 $ 0 .0 0
I n v e n t o r y h o l d i n g$ 2c ,o1 s3t 0 .$020 , 1 4 0 .$010 , 2 3 0 . 0 0$ 0 . 0 0 $ 0 . 0 0 $ 0 . 0 0$ 5 , 5 0 0 . 0 0
I n v e n t o r y s t o c k o u t c$ o0 s. 0t 0 $ 0 . 0 0 $ 0 . 0 0$ 3 , 3 5 0 .$0 50, 3 7 5 . $0 50 , 6 2 5 .$0 10 4 , 3 5 0 . 0 0

T O T A $L 2: 4 9 , 1 0 0 . 0 0

January costs: $8,448 = 6 [workers] * $1,408 [$/worker]

$ 31,900 = 6,380 [units] * $5 [$/unit]
$ 2,130 = 2,130 [surplus units] * $1 [$/unit held/month]
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 Aggregate Planning Example
Which Plan is Cheaper?

Level Capacity Chase

$249,100.00 $260,411.00

Clearly, the level capacity plan is cheaper over

the selected time horizon
Note: Be cautious in using the chase strategy as many
intangibles, such as employee loyalty and commitment
to the organization are adversely affected
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 Production Plan Example
Inventory
accumulation
1500 —
Inventory
consumption
1250 — 400
Paint (thousands of gallons)

Requirements
1000 —
Production plan
750 —
110
500 —

250 — 300

0 — 510

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1 2 3 4
Quarter 39
Staffing Strategies in Services: Level Strategy

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Staffing Strategies in Services: Chase Strategy

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Aggregate Planning Example via Excel

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Aggregate Planning Example via LP

43
Aggregate Planning Example
Computer Application

44
Aggregate Planning Example
Computer Application

45
Aggregate Planning Example

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The
The End
End

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