DAVIS

F O U R T H E D I T I O N AQUILANO

CHASE

chapter 15 Aggregate Planning

PowerPoint
Presentation
by
Charlie
Cook
© The McGraw-Hill Companies, Inc., 2003
 Chapter
Chapter Objectives
Objectives
• Demonstrate how aggregate planning links long-range
strategic planning and short-range scheduling.
• Present alternate strategies for matching supply and
demand: adjusting supply (an operations function) or
adjusting demand (a marketing function).
• Introduce strategies for developing aggregate plans
and ways to identify their strengths and weaknesses.
• Define marginal costs and total costs as they pertain
to aggregate planning.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–2

 Chapter
Chapter Objectives
Objectives (cont’d)
(cont’d)
• Introduce the concept of yield management as a tool
for matching supply and demand in service
operations.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–3

 Managerial
Managerial Issues
Issues
• Translating long-range strategic plans into daily work
schedules for the shop floor.
• Using aggregate planning to develop intermediate-
range plans that link the long-range strategic plan and
the short-range operational plan.
• Developing aggregate plans that match the demand
for products with the firm’s ability to supply the
products and to do so at minimum cost.
• Coordinating marketing management and operations
to develop an aggregate plan that is both effective and
efficient.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–4

 Overview
Overview of
of Operational
Operational
Planning
Planning Activities
Activities
• Long-Range Planning
–Focuses on strategic issues relation to capacity,
process, selection, and plant location.
• Intermediate-Range Planning
–Focuses on tactical issues pertaining to
aggregate workforce and material requirements
for the coming year.
• Short-Range Planning
–Addresses day-to-day issues of scheduling
workers on jobs at assigned work stations.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–5

 Aggregate
Aggregate Planning
Planning
• Aggregate Production Planning
–The process for determining the most cost
effective way to match supply and demand over
the next 12–18 months.
• Master Production Scheduling (MPS)
–Short-term scheduling of specific end product
requirements for the next several quarters.
• Rough-Cut or Resource Capacity Planning
–Determining that adequate production capacity
and warehousing are available to meet demand.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–6

 Overview
Overviewofof
Manufacturing
Manufacturing
Planning
PlanningActivities
Activities

Exhibit 15.1
Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–7
 Aggregate
Aggregate Production
Production Planning
Planning
• Production Rate
–The capacity of output per unit of time (such as
units per day or units per week.
• Workforce Level
–Number of workers required to provide a
specified level of production.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–8

 Aggregate
Aggregate Production
Production Planning
Planning (cont’d)
(cont’d)
• Inventory on Hand
–The surplus of units that results when
production exceeds demand in a given time
period.
• Backlog (or Stockout)
–The deficit in units that results when demand
exceeds the number of units produced in a
given time period.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–9

 Required
Required Inputs
Inputs to
to the
the Production
Production Planning
Planning System
System

Exhibit 15.2
Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–10
 Production
Production Planning
Planning Strategies
Strategies
• Chase Strategy
–Matching the production rate to exactly meet the
order rate by hiring and laying off workers as
the order rate varies.
• Stable Workforce—Variable Work Hours
–Varying output by varying the number of hours
worked through flexible schedules or overtime.
• Level Strategy
–Maintain a stable workforce working at constant
output rate; absorb demand variations with
inventory, backlogs, or lost sales.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–11

 Production
Production Planning
Planning Strategies
Strategies (cont’d)
(cont’d)
• Pure Strategy
–Either a chase strategy when product exactly
matches demand or a level strategy when
production remains constant over a specified
number of periods.
• Mixed Strategy
–A combination of chase and level strategies to
match supply and demand.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–12

 Pure
Pure Chase
Chase and
and Pure
Pure Level
Level Strategies
Strategies

Exhibit 15.3
Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–13
 Aggregate
Aggregate Production
Production Planning
Planning
• Relevant Costs
–Basic production costs (fixed and variable)
–Costs associated with changes in the
production rate (e.g., labor costs)
–Inventory holding costs
–Backlog (stockout) costs

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–14

 Aggregate
Aggregate Planning
Planning Techniques
Techniques
• Trial and Error
–Costing out the production alternatives and
choosing the one with the lowest cost.
• Linear Programming
• Linear Decision Rule
• Various Heuristic Methods

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–15

 Aggregate
Aggregate Planning
Planning Techniques
Techniques (cont’d)
(cont’d)
• Full Costs
–All of the actual, out-of-pocket costs associated
with a particular aggregate plan.
–Used for developing a labor and material
budget.
• Marginal (Incremental) Costs
–Unique costs attributable to a particular
aggregate plan that are above and beyond those
required to build the product by its most
economical means.

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–16

 Forecasted
Forecasted
Demand
Demandand and
Workdays
Workdaysfor
forC&A
C&A
Company
Company

Exhibit 15.4
Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–17
 First
First Alternative:
Alternative: Pure
Pure Chase
Chase Strategy
Strategy
Exhibit 15.5

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–18

Exhibit 15.6

Second
Second
Alternative:
Alternative:
Pure
PureLevel
Level
Strategy
Strategy

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–19

 Third
ThirdAlternative:
Alternative:
Minimum
Minimum
Workforce
Workforcewith
with
Subcontracting
Subcontracting

Exhibit 15.7
Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–20
 Constant
Constant
Workforce
Workforce
with
with
Overtime
Overtime
Strategy
Strategy

Exhibit 15.8
Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–21
 Summary
Summary of
of Costs
Costs for
for Aggregate
Aggregate Plans
Plans

Exhibit 15.9
Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–22
 Aggregate
Aggregate Planning
Planning Applied
Applied to
to Services:
Services:
Tucson
Tucson Parks
Parks and
and Recreation
Recreation Department
Department
• Actual Demand Requirement for Full-Time Direct
Employees and Full-Time Equivalent (FTE) Part-Time
Employees

Exhibit 15.10
Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–23
 Three
ThreePossible
PossiblePlans
Plansfor
forthe
theParks
Parksand
andRecreation
RecreationDepartment
Department

Exhibit 15.11

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–24

 Comparison
Comparison of
of Costs
Costs for
for All
All Three
Three Alternatives
Alternatives

Exhibit 15.12
Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–25
 Yield
Yield Management
Management
• Yield (Revenue) Management
–The concept used in service operations with
high-fixed costs and low-variable costs that
attempts to match supply and demand (a chase
strategy) to maximize capacity utilization.
• Yield Management Requires:
–The ability to segment the market
–High-fixed and low-variable costs where
additional sales create more profits
–Product perishability (cannot be inventoried)
–Lower-priced capacity that can be presold

Fundamentals of Operations Management 4e © The McGraw-Hill Companies, Inc., 2003 15–26