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Chapter 15

Operations Planning

Operations Management: Theory and Practice, 3e Author: B. Mahadevan

 Business Planning Exercise
• Business plan is strategic in nature and addresses the

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following questions:
– Should we meet the projected demand entirely or a portion of
the projected demand?
– What are the implications of this decision on the overall
competitive scenario and the firm’s standing in the market?
– How is this likely to affect the operating system and planning
in other functional areas of the business such as marketing
and finance?
– What resources should we commit to meet the chosen
demand during the planning horizon?
• Aggregate production planning seeks to translate business
plans to operational decisions
Operations Management: Theory and Practice, 3e Author: B. Mahadevan
 Planning Hierarchies in
Operations
Business Plan

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Marketing Plan Financial Plan

Operations Plan
(rough cut capacity)
Level 1

Level 2
Master Operations Schedule

Materials Capacity
Requirement Requirement
Plan Plan

Detailed Scheduling

Level 3 Shop Floor Control

Operations Management: Theory and Practice, 3e Author: B. Mahadevan

 Aggregate Operations Planning
Decision Variables: An illustration
• The decisions involve

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– Amount of resources (productive capacity and labour hours) to be
committed
– Rate at which goods and services needs to be produced during a period
– Inventory to be carried forward from one period to the next
• An example from Garment Manufacturing
– Produce at the rate of 9000 metres of cloth everyday during the months of
January to March
– Increase it to 11,000 metres during April to August
– Change the production rate to 10,000 metres during September to
December
– Carry 10% of monthly production as inventory during the first 9 months of
production.
– Work on a one-shift basis throughout the year with 20% over time during
July to October

Operations Management: Theory and Practice, 3e Author: B. Mahadevan

 Aggregate Units for Capacity
Examples

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Sl. No Product/Service Aggregate Unit of capacity

1 Phenyl Acetic Acid Metric tonnes

2 Data Entry Systems Numbers
3 Mini computer Value (ex-factory) in Rs.
4 Printed Circuit Board Square Metres
5 Alloy Iron Castings Metric tonnes
6 Cement Metric tonnes
7 Multi-specialty Clinic Patient-Bed Days
8 Bank No. of Accounts
9 Insurance Firm No. of Policies

Operations Management: Theory and Practice, 3e Author: B. Mahadevan

 Aggregate Operations Planning
Why is it necessary?
• Demand fluctuations

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• Capacity fluctuations
• Difficulty level in altering operation rates
– Operating systems are complex and varying the rate of
operation requires prior planning and co-ordination with
other trading partners
• Benefits of multi-period planning

Aggregate Operations Planning is done in an organisation to match the

demand with the supply on a period-by-period basis in a cost effective
manner

Operations Management: Theory and Practice, 3e Author: B. Mahadevan

 Aggregate Operations Planning
Framework
Alternatives for

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Forecasting Modifying demand

Arriving at effective
Targeted Demand
Period-by-period
to be fulfilled
Demand to be met

Arriving at
Actual period-by-period
Period-by-Period
Supply Schedules
Supply Schedules

Alternatives for
Modifying supply

Operations Management: Theory and Practice, 3e Author: B. Mahadevan

 Alternatives for managing
demand
• Reservation of Capacity

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– Hospital Appointment system
• Influencing Demand
– Special Tariffs
• Late night calls are cheaper
• Midnight flight to Bombay is cheap
– Differential Discount Structures
• Senior Citizen Discount
– Limited period special offers
• Happy Meal (Selected time of day)
Operations Management: Theory and Practice, 3e Author: B. Mahadevan
 Alternatives for Managing
Supply
• Inventory Based Alternatives

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– Stock out, Backordering/Backlogging
– Carrying Inventory
• Capacity Adjustment Alternatives
– Hiring/Lay-off of workers
– Varying shifts
– Varying Working Hours (OT,UT)
• Capacity Augmentation Alternatives
– Sub-contracting/Outsourcing
– De-bottlenecking
– Addition of new capacity
Operations Management: Theory and Practice, 3e Author: B. Mahadevan
 Aggregate Operations Planning
Alternatives
  Description of the alternative Costs
Alternatives for Reservation of capacity • Planning and Scheduling costs
managing
Influencing Demand • Marketing oriented costs

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demand
Inventory based alternatives  
(a) Build Inventory • Inventory holding costs
(b) Backlog/Backorder/Shortage •Shortage/Loss of Goodwill
Capacity Adjustment Alternatives
(a) Over Time/Under Time • OT premium, Lost productivity
Alternatives for
(b) Vary no. of shifts • Shift change costs
managing supply • Training/Hiring costs, Morale
(c) Hire/Lay-off workers issues
Capacity augmentation
alternatives  
(a) Sub-contract/Outsource • Transaction costs for sub-contract
(b) De-bottleneck • Annualised de-bottlenecking cost
(c) Add new capacity • Annualised cost of new capacity

Operations Management: Theory and Practice, 3e Author: B. Mahadevan

 Aggregate Operations Planning
Two generic strategies
 In Level strategy, the emphasis is not to disturb the existing
production rate at all

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 In Chase strategy, no effort is made to carry inventory from one
period to another; the supply – demand mismatch is addressed
during each period by employing capacity related alternatives
AOP Strategy AOP alternatives applicable Key features
Inventory based alternatives Inventory as the critical link between
Level Strategy (a) Build Inventory the periods; Made-to-stock
environments; Products with low
(b) Backlog/Backorder/Shortage risks of obsolescence

Capacity adjustment alternatives

(a) Over Time/Under Time
(b) Vary no. of shifts No inventory carried from one
Chase Strategy period to another; Made-to-order
(c) Hire/Lay-off workers and project environments; Several
service systems
Capacity augmentation alternatives
(a) Sub-contract/Outsource
(b) De-bottleneck

Operations Management: Theory and Practice, 3e Author: B. Mahadevan

 Level Strategy
Example 15.1

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Operations Management: Theory and Practice, 3e Author: B. Mahadevan
 Cost of level strategy
Example 15.1.

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Operations Management: Theory and Practice, 3e Author: B. Mahadevan
 Chase strategy using OT/UT
Example 15.2

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Operations Management: Theory and Practice, 3e Author: B. Mahadevan
 Chase strategy using
Hire/Layoff
Example 15.2

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Operations Management: Theory and Practice, 3e Author: B. Mahadevan
 AOP using Mixed Strategy
Example 15.3

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Operations Management: Theory and Practice, 3e Author: B. Mahadevan
 Evaluating alternative
strategies
Example 15.4

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Operations Management: Theory and Practice, 3e Author: B. Mahadevan
 Plan (a): Level Strategy
Example 15.4

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Operations Management: Theory and Practice, 3e Author: B. Mahadevan
 Plan (b): Half-yearly production
rates
Example 15.4

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Operations Management: Theory and Practice, 3e Author: B. Mahadevan
 Plan (c): Chase Strategy with
UT/OT
Example 15.4

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Operations Management: Theory and Practice, 3e Author: B. Mahadevan
 Plan (d): Mixed Strategy
Example 15.4

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Operations Management: Theory and Practice, 3e Author: B. Mahadevan
 Aggregate Operations Planning
Alternative methods
• Optimal Methods

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– Linear Programming (LP)
– Transportation
– Dynamic Programming (DP)
• Heuristics
– Trial & Error Methods (Examples 15.1. to 15.4.)
– Generalised search methods
– Linear Decision Rule (LDR)
• Simulation
Operations Management: Theory and Practice, 3e Author: B. Mahadevan
 Search Procedure
Identify parameters

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Start Setup the stopping
criterion

Generate one
candidate solution.
Evaluate the cost

No Have we met No
Current solution
the stopping
the best?
criterion?

Yes
Yes
Replace the best solution
with the current solution End

Operations Management: Theory and Practice, 3e Author: B. Mahadevan

 Demand
Supply
Period 1 Period 2 Period 3 Period 4
Constraints
Initial 0 2 4 6
25,000
Inventory
A Transportation Period 1 RP
80 82 84 86
80,000
Problem 120 122 124 126
formulation for Period 1 OP 16,000

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Aggregate Operations Period 1 SC
105 107 109 111
100,000

Planning (Example 15.5) Period 2 RP

80 82 84
80,000

120 122 124

Period 2 OP 16,000

Supply
105 107 109
Period 2 SC 100,000

Cb3 Cb4
Period 3 RP 65,000

Cc3 Cc4
Period 3 OP 13,000

Cb3 Cb4
Period 3 SC 100,000

80
Period 4 RP 80,000

120
Period 4 OP 16,000

105
Period 4 SC 100,000

 
Indicates no feasible Demand
105,000 57,000 76,000 110,000
APP alternative available Requirements

Operations Management: Theory and Practice, 3e Author: B. Mahadevan

 Linear Programming Method for
Cost parameters
AOP
An illustration
Cr Per unit cost of regular production

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Co Per unit cost of overtime production
Cs Per unit cost of sub-contracted units
Ch Per unit cost related to hiring of workers
Cl Per unit cost related to laying off workers
Ci Per unit costs related to inventory

Decision variables for the time period “t”

Rt Number of units produced in regular time
Ot Number of units produced using over time
St Number of units obtained through sub-contracting
Ht Number of additional units obtained though hiring of workers
Lt Number of units reduced through laying off workers
It Inventory during the period

Other parameters
Dt Projected Demand during the period
 K Minimum amount to be sub-contracted 0  1
Maximum allowable OT as a proportion of regular production ( )
Operations Management: Theory and Practice, 3e Author: B. Mahadevan
 Linear Programming Method for
AOP
Objective function An illustration…

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N
Min TC APP   C R  C O  C S
t 1
r t o t s t  C h H t  Cl Lt  Ci I t 

Subject to the constraints

Amount Produced in regular time : Rt  Rt 1  H t  Lt  t  1,2,3,..., N
Inventory Balance Equation: I t  I t 1   Rt  Ot  St   Dt  t  1,2,3,..., N

Over time constraint: Ot  Rt  t  1,2,3,..., N

Sub-contracting constraint: St  K  t  1,2,3,..., N

Non-negativity constraint: Rt , Ot , H t , Lt , S t , I t  0  t  1,2,3,..., N

Operations Management: Theory and Practice, 3e Author: B. Mahadevan

 Master Operations Scheduling
Linkages with AOP & Forecasting

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Aggregate
Order
Inflow Operations Forecasting
Planning
Market

Master
Capacity Plan Operations Materials Plan
Scheduling

Labour & Actual

Vendors
Resources Operations
Resource Material
availability Inflow

Operations Management: Theory and Practice, 3e Author: B. Mahadevan

 Dis-aggregation process in
Capacity Planned using AOP
MOS 18,000
An illustration
Silver 20

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Capacity Required/unit Gold 40
Platinum 70

Type of Planning Horizon

service Demand status
Month 1 Month 2 Month 3
Forecast 100 120 140
Silver
Firm Order 120 90 30
Forecast 200 240 180
Gold
Firm Order 180 200 60
Forecast 80 100 90
Platinum
Firm Order 50 110 20
MOS
Quantity   Shaded area represents MOS Qty.
Capacity required (for MOS
Quantity) 16,000 19,700 16,300

Operations Management: Theory and Practice, 3e Author: B. Mahadevan

 Operations Planning
Chapter Highlights
• Aggregate Operations Planning (AOP) serves to translate the
business plans into operational decisions

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• The decisions include
– amount of resources (productive capacity and labour hours) to
commit,
– rate at which to produce
– inventory to be carried forward from one period to the next
• AOP is done to match the demand and the available capacity
on a period-by-period using a set of alternatives available to
modify demand and/or the supply
• Alternatives for modifying demand include reservation of
capacity and methods of influencing (changing) the demand
during a period
• Alternatives for modifying the supply include inventory
variations, capacity adjustment and capacity augmentati on
Operations Management: Theory and Practice, 3e Author: B. Mahadevan
 Operations Planning
Chapter Highlights…
• AOP exercise employs the two generic strategies; chase and
level production. A chase strategy is often found to be

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expensive and hard to implement in organisations
• In reality a mixed strategy using a combination of alternatives
is employed in an AOP exercise. It uses a variety of
alternatives for modifying supply.
• The structure of a transportation model lends itself to
studying the AOP problem
• Linear programming can also be used to model the AOP
problem
• MOS involves dis-aggregation of product information and
ensuring the required capacity and material are available as
per the plan
Operations Management: Theory and Practice, 3e Author: B. Mahadevan