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Operations Management: Sustainability

and Supply Chain Management Learning Objectives (1 of 2)
Twelfth Edition
13.1 Define sales and operations planning
13.2 Define aggregate planning
Chapter 7
13.3 Identify optional strategies for developing an
Aggregate Planning aggregate plan

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Learning Objectives (2 of 2) The Planning Process

13.4 Prepare a graphical aggregate plan Figure 13.1 Planning Tasks and Responsibilities

13.5 Solve an aggregate plan via the transportation

method
13.6 Understand and solve a revenue management
problem

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Sales and Operations Planning (1 of 3) S&OP and the Aggregate Plan

• Coordination of demand forecasts with functional areas Figure 13.2 Relationships of S&OP and the Aggregate Plan
and the supply chain
• Typically done by cross-functional teams
• Determine which plans are feasible
• Limitations must be reflected
• Provides warning when resources do not match
expectations
• Output is an aggregate plan

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Sales and Operations Planning (2 of 3) Sales and Operations Planning (3 of 3)

• Decisions must be tied to strategic planning and • Requires

integrated with all areas of the firm over all planning – A logical unit for measuring sales and output
horizons
– A forecast of demand for a reasonable intermediate
• S&OP is aimed at planning period in aggregate terms
– A method to determine the relevant costs
1) The coordination and integration of the internal and
external resources necessary for a successful – A model that combines forecasts and costs so
aggregate plan scheduling decisions can be made for the planning
period
2) Communication of the plan to those charged with its
execution

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Aggregate Planning (1 of 3) Aggregate Planning (2 of 3)

The objective of aggregate planning is usually to meet Quarter 1

forecast demand while minimizing cost over the Jan. Feb. March
planning period 150,000 120,000 110,000

Quarter 2

April May June

100,000 130,000 150,000

Quarter 3

July Aug. Sept.

180,000 150,000 140,000

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Aggregate Planning (3 of 3) Aggregate Planning Strategies

• Combines appropriate resources into general terms 1. Should inventories be used to absorb changes in
demand?
• Part of a larger production planning system
2. Should changes be accommodated by varying the size
• Disaggregation breaks the plan down into greater detail
of the workforce?
• Disaggregation results in a master production schedule
3. Should part-timers be used, or should overtime or idle
time absorb fluctuations?
4. Should subcontractors be used and maintain a stable
workforce?
5. Should prices or other factors be changed to influence
demand?

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Capacity Options (1 of 5) Capacity Options (2 of 5)

1. Changing inventory levels 2. Varying workforce size by hiring or layoffs

– Increase inventory in low demand periods to meet – Match production rate to demand
high demand in the future – Training and separation costs for hiring and laying off
– Increases costs associated with storage, insurance, workers
handling, obsolescence, pilferage, and capital – New workers may have lower productivity
investment
– Laying off workers may lower morale and productivity
– Shortages may mean lost sales due to long lead
times and poor customer service

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Capacity Options (3 of 5) Capacity Options (4 of 5)

3. Varying production rates through overtime or idle 4. Subcontracting

time – Temporary measure during periods of peak demand
– Allows constant workforce – May be costly
– May be difficult to meet large increases in demand – Assuring quality and timely delivery may be difficult
– Overtime can be costly and may drive down – Exposes your customers to a possible competitor
productivity
– Absorbing idle time may be difficult

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Capacity Options (5 of 5) Demand Options (1 of 3)

5. Using part-time workers 1. Influencing demand

– Useful for filling unskilled or low skilled positions, – Use advertising or
especially in services promotion to
increase demand in
low periods
– Attempt to shift
demand to slow
periods
– May not be sufficient
to balance demand
and capacity

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Demand Options (2 of 3) Demand Options (3 of 3)

2. Back ordering during high-demand periods 3. Counterseasonal product and service mixing
– Requires customers to wait for an order without loss – Develop a product mix of counterseasonal items
of goodwill or the order – May lead to products or services outside the
– Most effective when there are few if any substitutes company’s areas of expertise
for the product or service
– Often results in lost sales

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Table 13.1 Aggregate Planning Options (1 of 4) Table 13.1 Aggregate Planning Options (2 of 4)

Option Advantages Disadvantages Comments Option Advantages Disadvantages Comments

Changing Changes in Inventory holding Applies mainly to Varying Matches seasonal Overtime premiums; Allows flexibility
inventory human resources cost may increase. production, not production fluctuations tired workers; may within the
levels are gradual or Shortages may service, rates without hiring/ not meet demand. aggregate plan.
none; no abrupt result in lost sales. operations. through training costs.
production overtime or
changes. idle time

Varying Avoids the costs Hiring, layoff, and Used where size Sub- Permits flexibility Loss of quality Applies mainly in
workforce of other training costs may of labor pool is contracting and smoothing of control; reduced production
size by alternatives. be significant. large. the firm’s output. profits; loss of future settings.
hiring or business.
layoffs

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Table 13.1 Aggregate Planning Options (3 of 4) Table 13.1 Aggregate Planning Options (4 of 4)

Option Advantages Disadvantages Comments Option Advantages Disadvantages Comments

Using part- Is less costly and High turnover/ Good for Back May avoid Customer must be Many companies
time more flexible than training costs; unskilled jobs in ordering overtime. Keeps willing to wait, but back order.
workers full-time workers. quality suffers; areas with large during high- capacity constant. goodwill is lost.
scheduling difficult. temporary labor demand
pools. periods

Influencing Tries to use Uncertainty in Creates Counter- Fully utilizes May require skills or Risky finding
demand excess capacity. demand. Hard to marketing ideas. seasonal resources; allows equipment outside products or
Discounts draw match demand to Overbooking product and stable workforce. the firm’s areas of services with
new customers. supply exactly. used in some service expertise. opposite demand
businesses. mixing patterns.

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Mixing Options to Develop a Plan (1 of 3) Mixing Options to Develop a Plan (2 of 3)

• A mixed strategy may be the best way to achieve • Chase strategy

minimum costs – Match output rates to demand forecast for each
• There are many possible mixed strategies period
– Vary workforce levels or vary production rate
• Finding the optimal plan is not always possible
– Favored by many service organizations

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Mixing Options to Develop a Plan (3 of 3) Methods for Aggregate Planning

• Level strategy • Graphical Methods

– Daily production is uniform • Popular techniques
– Use inventory or idle time as buffer – Easy to understand and use
– Stable production leads to better quality and – Trial-and-error approaches that do not guarantee an
productivity optimal solution
• Some combination of capacity options, a mixed – Require only limited computations
strategy, might be the best solution

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Graphical Methods Roofing Supplier Example 1 (1 of 3)

1. Determine the demand for each period Table 13.2 Monthly Forecasts

2. Determine the capacity for regular time, overtime, and Expected Production Demand Per Day
subcontracting each period Month Demand Days (Computed)
Jan 900 22 41
3. Find labor costs, hiring and layoff costs, and inventory Feb 700 18 39
holding costs Mar 800 21 38
4. Consider company policy on workers and stock levels Apr 1,200 21 57
May 1,500 22 68
5. Develop alternative plans and examine their total cost June 1,100 20 55
Blank 6,200 124 Blank

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Roofing Supplier Example 1 (2 of 3) Roofing Supplier Example 1 (3 of 3)

Total expected demand Figure 13.3 Graph of Forecast and Average Forecast Demand
Average requirement =
Number of production days
6,200
= = 50 units per day
124

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Roofing Supplier Example 2 (1 of 4) Roofing Supplier Example 2 (2 of 4)

Production Monthly
Table 13.3 Cost Information Production at 50 units Demand Inventory Ending
Month Days per day Forecast Change Inventory
Inventory carrying cost $ 5 per unit per month Jan 22 1,100 900 +200 200
Subcontracting cost per unit $20 per unit Feb 18 900 700 +200 400
Mar 21 1,050 800 +250 650
Average pay rate $10 per hour ($80 per day)
Apr 21 1,050 1,200 –150 500
$17 per hour –400
Overtime pay rate May 22 1,100 1,500 100
(above 8 hours per day)
June 20 1,000 1,100 –100 0
Labor-hours to produce a unit 1.6 hours per unit
Blank Blank Blank Blank Blank 1,850
Cost of increasing daily production rate $300 per unit
(hiring and training)
Total units of inventory carried over from one month to the next =
Cost of decreasing daily production rate $600 per unit
(layoffs)
1,850 units
Workforce required to produce 50 units per day= 10 workers
Plan 1 – constant workforce
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Roofing Supplier Example 2 (3 of 4) Roofing Supplier Example 2 (4 of 4)

Cost Blank Calculations Figure 13.4 Cumulative Graph for Plan 1
Inventory carrying $ 9,250 (= 1,850 units carried ×
$5 per unit)
Regular-time labor 99,200 (= 10 workers × $80 per
day × 124 days)
Other costs (overtime, Blank
hiring, layoffs,
subcontracting) 0
Total cost $108,450 Blank

Total units of inventory carried over from one month to the next =
1,850 units
Workforce required to produce 50 units per day= 10 workers

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Roofing Supplier Example 3 (1 of 2) Roofing Supplier Example 3 (2 of 2)

In-house production = 38 units per day × 124 days

= 4,712 units
Subcontract units = 6,200 − 4,712
= 1,488 units

Cost Blank Calculations

Regular-time labor $ 75,392 (= 7.6 workers × $80 per day × 124
days)
Subcontracting 29,760 (= 1,488 units × $20 per unit)
Total cost $105,152 Blank

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Roofing Supplier Example 4 (1 of 2) Roofing Supplier Example 4 (2 of 2)

Table 13.4 Cost Computations for Plan 3
Basic
Production Extra cost of Extra Cost of
Forec Daily Cost (demand × Increasing Decreasing
ast Prod 1.6 hrs/unit × Production Production
Month (units) rate $10/hr) (Hiring Cost) (Layoff Cost) Total Cost
Jan 900 41 $ 14,400 — — $ 14,400
$1,200
Feb 700 39 11,200 — 12,400
(= 2 × $600)
$600
Mar 800 38 12,800 — 13,400
(= 1 × $600)
$5,700
Apr 1,200 57 19,200 — 24,900
(= 19 × $300)
$3,300
May 1,500 68 24,000 — 24,300
(= 11 × $300)
$7,800
June 1,100 55 17,600 — 25,400
(= 13 × $600)

Blank Blank Blank $99,200 $9,000 $9,600 $117,800

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Comparison of Three Plans Mathematical Approaches

Table 13.5 Comparison of the Three Plans • Useful for generating strategies
Cost Plan 1 Plan 2 Plan 3 – Transportation Method of Linear Programming
Inventory carrying $ 9,250 $ 0 $ 0 ▪ Produces an optimal plan
Regular labor 99,200 75,392 99,200 ▪ Works well for inventories, overtime,
Overtime labor 0 0 0 subcontracting
Hiring 0 0 9,000 ▪ Does not work when nonlinear or negative factors
Layoffs 0 0 9,600 are introduced
Subcontracting 0 29,760 0 • Other Models
Total cost $108,450 $105,152 $117,800
– General form of linear programming
Plan 2 is the lowest cost option – Simulation

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Transportation Method (1 of 2) Transportation Method (2 of 2)

Table 13.6 Farnsworth’s Production, Demand, Capacity, and Cost Data

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Transportation Example (1 of 3) Transportation Example (3 of 3)

• Important points Table 13.7 Farnsworth’s Transportation Tablea

1. Carrying costs are $2/tire/month. If goods are made in

one period and held over to the next, holding costs
are incurred.
2. Supply must equal demand, so a dummy column
called “unused capacity” is added.
3. Because back ordering is not viable in this example,
cells that might be used to satisfy earlier demand are
not available.

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Aggregate Planning in Services Five Service Scenarios (1 of 2)

• Most services use combination strategies and mixed • Restaurants

plans
1) Smoothing the production process
• Controlling the cost of labor is critical 2) Determining the optimal workforce size
1. Accurate scheduling of labor-hours to assure quick • Hospitals
response to customer demand – Responding to patient demand
2. An on-call labor resource to cover unexpected
demand • National Chains of Small Service Firms
3. Flexibility of individual worker skills – Planning done at national level and at local level
4. Flexibility in rate of output or hours of work

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Five Service Scenarios (2 of 2) Revenue Management

• Miscellaneous Services • Allocating resources to customers at prices that will

– Plan human resource requirements maximize revenue
– Manage demand 1. Service or product can be sold in advance of
consumption
• Airline industry
2. Demand fluctuates
– Extremely complex planning problem
3. Relatively fixed resource (capacity)
1) Number of flights
4. Segmentable demand
2) Number of passengers on all flights 5. Low variable costs high fixed costs
3) Air and ground personnel at each hub and airport
4) Allocation of seats to fare classes

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Revenue Management Example (1 of 2) Revenue Management Example (2 of 2)

Figure 13.5 Hotel Sets Only One Price Level Figure 13.6 Hotel with Two Price Levels

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Revenue Management Approaches (1 of 2) Revenue Management Approaches (2 of 2)

• Airlines, hotels, rental cars, etc. • Restaurants, golf courses

– Tend to have predictable duration of service and use – Generally have unpredictable duration of customer
variable pricing to control availability and revenue use and fixed prices, may use “off-peak” rates to shift
demand and manage revenue
• Movies, arenas, performing arts centers
– Tend to have predicable duration and fixed prices but
use seating locations and times to manage revenue

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Making Revenue Management Work

1. Multiple pricing structures must be feasible and

appear logical to the customer
2. Forecasts of the use and duration of use
3. Managing changes in demand

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