Aggregate (Sales & Operations) Planning

CHAPTER 16
Aggregate Sales &

Operations Planning
Tata McGraw
Learning Outcomes
After discussion of this chapter students

should be able to:
Develop an aggregate plan for the resources
Adopt a chase strategy
Adopt a level strategy
Assist the upper-middle-level managers in
formulating SOP in their respective jobs
16-3
OBJECTIVES
Sales and Operations Planning
The Aggregate Operations Plan
Examples on Chase and Level strategies
16-4
Process planning
Long
range
Supply network
planning
Strategic capacity
planning
Forecasting and
demand management
Sales and operations

(aggregate) planning
Sales
plan
Medium
range
Manufacturing
Master scheduling
Material requirements
planning
Order scheduling
Short
range
Logistics
Aggregate
operations
plan
Services
Vehicle capacity
planning
Vehicle loading
Vehicle dispatching
Warehouse
receipt
planning
Weekly workforce
scheduling
Daily workforce
scheduling
1-4
16-5
Sales and Operations Planning horizons
Long-range planning
Greater than one year planning horizon

Usually performed in annual increments
Medium-range planning
Six to eighteen months

Usually with weekly, monthly or quarterly
increments
Short-range planning
One day to less than six months

Usually with weekly or daily increments
16-6
The Aggregate Operations Plan
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)
Product group or broad category
(Aggregation)
This planning is done over an intermediaterange planning period of 3 to18 months
16-7
Balancing Aggregate Demand

and Aggregate Production Capacity
Suppose
Supposethe
thefigure
figureto
to
the
theright
rightrepresents
represents
forecast
forecastdemand
demandin
in
units
units
Now
Nowsuppose
supposethis
this
lower
lowerfigure
figurerepresents
represents
the
theaggregate
aggregatecapacity
capacity
of
ofthe
thecompany
companyto
to
meet
meetdemand
demand
10000
10000
8000
8000
6000
7000
6000
5500
4500
4000
2000
0
Jan
Feb
Mar
9000
10000
Apr
May
Jun
8000
8000
What
Whatwe
wewant
wantto
todo
dois
is
balance
balanceout
outthe
the
production
productionrate,
rate,
workforce
workforcelevels,
levels,and
and
inventory
inventoryto
tomake
make
these
thesefigures
figuresmatch
matchup
up
6000
6000
4500
4000
Jan
Feb
4000
4000
2000
0
Mar
Apr
May
Jun
16-8
Required Inputs to the Production Planning System
Competitors
behavior
External
capacity
Current
physical
capacity
Raw material
availability
Planning
for
production
Current
workforce
Inventory
levels
Market
demand
External
to firm
Economic
conditions
Activities
required
for
production
Internal
to firm
16-9
Key Strategies for Meeting Demand
Chase strategy
Stable workforce (variable work hrs)
Level strategy
Mixed strategy
Subcontracting
16-10
Relevant Costs
Basic production cost

Fixed-variable, direct-indirect labor, regular-overtime
Costs associated with change in production rate

Hiring (regular / temporary), training, laying-off
Inventory holding cost

Cost of capital tied-up, storing, insurance, taxes,
spoilage, pilferage, obsolescence
Back ordering cost

Expediting, loss of goodwill, loss of sales
16-11
Aggregate Planning Examples: Unit Demand and Cost Data
Suppose
Supposewe
wehave
havethe
thefollowing
followingunit
unit
demand
demandand
andcost
costinformation:
information:
Demand/mo Jan Feb Mar Apr May
4500
5500
7000
Jun
10000
8000
6000
Materials
$5/unit
Holding costs
$1/unit per mo.
Marginal cost of stockout
$1.25/unit per mo.
Hiring and training cost
$200/worker
Layoff costs
$250/worker
Labor hours required
.15 hrs/unit
Straight time labor cost
$8/hour
Beginning inventory
250 units
Productive hours/worker/day
7.25
Paid straight hrs/day
8
16-12
Cut-and-Try Example: Determining

Straight Labor Costs and Output
Given
Giventhe
thedemand
demandand
andcost
costinformation
informationbelow,
below,what
what
are
arethe
theaggregate
aggregatehours/worker/month,
hours/worker/month,units/worker,
units/worker,and
and
dollars/worker?
dollars/worker?
Demand/mo
4500
Jan Feb Mar Apr May Jun

5500
7000
Productive hours/worker/day 7.25

Paid straight hrs/day
8
22x8hrsx$8=$1408
10000
8000
6000
7.25 x 22 = 159.5
7.25 / 0.15=48.33 &
48.33x22=1063.33
Chase Strategy
16-13
(Hiring & Firing to meet demand)
Days/mo
Hrs/worker/mo
Units/worker
$/worker
Demand
Beg. inv.
Net req.
Req. workers
Hired
Fired
Workforce
Ending inventory
J an
22
159.5
1,063.33
$1,408
J an
4,500
250
4,250
3.997
3
4
0
Lets
Letsassume
assumeour
ourcurrent
currentworkforce
workforceis
is77workers.
workers.
First, calculate net requirements for

production, or 4500-250=4250 units
Then, calculate number of workers
needed to produce the net
requirements, or
4250/1063.33=3.997 or 4 workers
Finally, determine the number of
workers to hire/fire. In this case we
only need 4 workers, we have 7, so
3 can be fired.
16-14
Below
Beloware
arethe
thecomplete
completecalculations
calculationsfor
forthe
theremaining
remaining
months
monthsin
inthe
thesix
sixmonth
monthplanning
planninghorizon
horizon
Days/mo
Hrs/worker/mo
Units/worker
$/worker
Demand
Beg. inv.
Net req.
Req. workers
Hired
Fired
Workforce
Ending inventory
J an
22
159.5
1,063
$1,408
Feb
19
137.75
918
1,216
Mar
21
152.25
1,015
1,344
Apr
21
152.25
1,015
1,344
May
22
159.5
1,063
1,408
J un
20
145
967
1,280
J an
4,500
250
4,250
3.997
Feb
5,500
Mar
7,000
Apr
10,000
May
8,000
J un
6,000
5,500
5.989
2
7,000
6.897
1
10,000
9.852
3
8,000
7.524
6,000
6.207
2
8
0
1
7
0
3
4
0
6
0
7
0
10
0
16-15
Below are the complete calculations for the remaining months in

the six month planning horizon with the other costs included
Demand
Beg. inv.
Net req.
Req. workers
Hired
Fired
Workforce
Ending inventory
Material
Labor
Hiring cost
Firing cost
Jan
4,500
250
4,250
3.997
3
4
0
Feb
5,500
Mar
7,000
Apr
10,000
May
8,000
Jun
6,000
5,500
5.989
2
7,000
6.897
1
10,000
9.852
3
8,000
7.524
6,000
6.207
2
8
0
1
7
0
6
0
7
0
10
0
Jan
Feb
Mar
Apr
May
Jun
$21,250.00 $27,500.00 $35,000.00 $50,000.00 $40,000.00 $30,000.00
5,627.59 7,282.76 9,268.97 13,241.38 10,593.10 7,944.83
400.00
200.00
600.00
750.00
500.00
250.00
Costs
203,750.00
53,958.62
1,200.00
1,500.00
$260,408.62
16-16
Level Workforce Strategy (Surplus and Shortage Allowed)

Lets
Letstake
takethe
thesame
sameproblem
problemas
as
before
beforebut
butthis
thistime
timeuse
usethe
the
Level
LevelWorkforce
Workforcestrategy
strategy
This
Thistime
timewe
wewill
willseek
seekto
touse
use
aaworkforce
workforcelevel
levelof
of66workers
workers
Demand
Beg. inv.
Net req.
Workers
Production
Ending inventory
Surplus
Shortage
J an
4,500
250
4,250
6
6,380
2,130
2,130
16-17
Below
Below are
arethe
thecomplete
completecalculations
calculationsfor
for the
theremaining
remaining
months
monthsin
inthe
thesix
sixmonth
month planning
planninghorizon
horizon
Demand
Beg. inv.
Net req.
Workers
Production
Ending inventory
Surplus
Shortage
Jan
4,500
250
4,250
6
6,380
2,130
2,130
Feb
5,500
2,130
3,370
6
5,510
2,140
2,140
Mar
7,000
2,140
4,860
6
6,090
1,230
1,230
Apr
10,000
1,230
8,770
6
6,090
-2,680
May
8,000
-2,680
10,680
6
6,380
-1,300
Jun
6,000
-1,300
7,300
6
5,800
-1,500
2,680
1,300
1,500
Note,
Note, ifif we
we recalculate
recalculate this
this sheet
sheet with
with 77 workers
workers
we
we would
would have
have aa surplus
surplus
Below
Below are
are the
the complete
complete calculations
calculations for
for the
the
remaining
remaining months
months in
in the
the six
six month
month planning
planning
horizon
horizon with
with the
the other
other costs
costs included
included
Jan
4,500
250
4,250
6
6,380
2,130
2,130
Jan
$8,448
31,900
2,130
Feb
5,500
2,130
3,370
6
5,510
2,140
2,140
Feb
$7,296
27,550
2,140
Mar
7,000
10
4,860
6
6,090
1,230
1,230
Mar
$8,064
30,450
1,230
Apr
10,000
-910
8,770
6
6,090
-2,680
May
8,000
-3,910
10,680
6
6,380
-1,300
Jun
6,000
-1,620
7,300
6
5,800
-1,500
2,680
1,300
1,500
Apr
$8,064
30,450
May
$8,448
31,900
Jun
$7,680
29,000
3,350
1,625
1,875
16-18
Note,
Note, total
total
costs
costsunder
under
this
this strategy
strategy
are
are less
lessthan
than
Chase
Chase at
at
$260.408.62
$260.408.62
$48,000.00
181,250.00
5,500.00
6,850.00
Labor cost
Material ,,
Storage ,,
Stockout ,,
$241,600.00 Total cost
16-19
Question Bowl
Sales and Operations Planning

activities are usually conducted
during which planning time
horizon?
a. Long-range
b. Intermediate-range
c. Short-range
d. Really short-range
e. None of the above
Answer: b. Intermediate-range (i.e., 6 to
18 months)
16-20
Question Bowl
Which of the following are

Production Planning Strategies
can involve trade-offs among the
workforce size, work hours,
inventory, and backlogs?
a. Chase strategy
b. Stable workforce-variable work
hours
c. Level strategy
d. All of the above
Answer: d. All of the above
16-21
Question Bowl
Which of the following are considered

relevant costs in the Aggregate
Production Plan?
a. Costs associated with changes in
the production rate
b. Inventory holding costs
c. Backordering costs
d. Basic production costs
e. All of the above
Answer: e. All of the above
16-22
Question Bowl
Which of the following Aggregate

Planning Techniques can be
performed using simple
spreadsheets?
a. Cut-and-try
b. Linear programming
c. Transportation method
d. All of the above
Answer: a. Cut-and-try (The other two involve more
complex computational effort than simple
spreadsheets.)
16-23
End of Chapter 16

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CHAPTER 16

Aggregate Sales &

After discussion of this chapter students

Sales and operations

Sales and Operations Planning horizons

Greater than one year planning horizon

Six to eighteen months

One day to less than six months

The Aggregate Operations Plan

Balancing Aggregate Demand

Required Inputs to the Production Planning System

Key Strategies for Meeting Demand

Basic production cost

Costs associated with change in production rate

Inventory holding cost

Back ordering cost

Aggregate Planning Examples: Unit Demand and Cost Data

Cut-and-Try Example: Determining

Jan Feb Mar Apr May Jun

Productive hours/worker/day 7.25

(Hiring & Firing to meet demand)

First, calculate net requirements for

Below are the complete calculations for the remaining months in

Level Workforce Strategy (Surplus and Shortage Allowed)

$241,600.00 Total cost

Sales and Operations Planning

Which of the following are

Answer: d. All of the above

Which of the following are considered

Which of the following Aggregate

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