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Copyright 2006 John Wiley & Sons, Inc.Beni Asllani
University of Tennessee at Chattanooga
Aggregate Planning
Operations Management - 5thEdition
Chapter 13
Roberta Russell & Bernard W. Taylor, III
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Copyright 2006 John Wiley & Sons, Inc. 13-2
Lecture Outline
Aggregate Planning Process
Strategies for Adjusting Capacity
Strategies for Managing Demand
Quantitative Techniques for AggregateProduction Planning
Hierarchical Nature of Planning
Aggregate Planning for Services
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Copyright 2006 John Wiley & Sons, Inc. 13-3
Aggregate Planning
Determine the resource capacity needed tomeet demand over an intermediate time
horizon Aggregaterefers to product lines or families
Aggregate planning matches supply and demand
Objectives Establish a company wide game plan for allocating
resources Develop an economic strategy for meeting
demand
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Copyright 2006 John Wiley & Sons, Inc. 13-4
Aggregate Planning Process
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Copyright 2006 John Wiley & Sons, Inc. 13-5
Meeting Demand Strategies
Adjusting capacity
Resources necessary to meet demand
are acquired and maintained over thetime horizon of the plan
Minor variations in demand are handledwith overtime or under-time
Managing demand Proactive demand management
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Copyright 2006 John Wiley & Sons, Inc. 13-6
Strategies for Adjusting Capacity
Level production Producing at a constant rate
and using inventory to
absorb fluctuations indemand
Chase demand Hiring and firing workers to
match demand
Peak demand Maintaining resources for
high-demand levels
Overtime and under-time Increasing or decreasing
working hours
Subcontracting Let outside companies
complete the work
Part-time workers Hiring part time workers to
complete the work Backordering
Providing the service orproduct at a later time period
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Level Production
Demand
Units
Time
Production
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Chase Demand
Demand
Units
Time
Production
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Strategies for Managing Demand
Shifting demand intoother time periods Incentives Sales promotions Advertising campaigns
Offering products orservices with counter-cyclical demand patterns
Partnering with suppliersto reduce informationdistortion along thesupply chain
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Quantitative Techniques For APP
Pure Strategies
Mixed Strategies
Linear Programming
Transportation Method
Other Quantitative
Techniques
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Pure Strategies
Hiring cost = $100 per worker
Firing cost = $500 per worker
Regular production cost per pound = $2.00
Inventory carrying cost = $0.50 pound per quarter
Production per employee = 1,000 pounds per quarter
Beginning work force = 100 workers
QUARTER SALES FORECAST (LB)
Spring 80,000
Summer 50,000
Fall 120,000
Winter 150,000
Example:
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Level Production StrategyLevel production
= 100,000 pounds(50,000 + 120,000 + 150,000 + 80,000)
4
Spring 80,000 100,000 20,000
Summer 50,000 100,000 70,000
Fall 120,000 100,000 50,000Winter 150,000 100,000 0
400,000 140,000
Cost of Level Production Strategy
(400,000 X $2.00) + (140,00 X $.50) = $870,000
SALES PRODUCTIONQUARTER FORECAST PLAN INVENTORY
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Chase Demand Strategy
Spring 80,000 80,000 80 0 20
Summer 50,000 50,000 50 0 30
Fall 120,000 120,000 120 70 0
Winter 150,000 150,000 150 30 0
100 50
SALES PRODUCTION WORKERS WORKERS WORKERSQUARTER FORECAST PLAN NEEDED HIRED FIRED
Cost of Chase Demand Strategy
(400,000 X $2.00) + (100 x $100) + (50 x $500) = $835,000
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Mixed Strategy
Combination of Level Production andChase Demand strategies
Examples of management policies no more than x% of the workforce can be
laid off in one quarter inventory levels cannot exceed xdollars
Many industries may simply shut downmanufacturing during the low demandseason and schedule employeevacations during that time
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General Linear Programming (LP)
Model
LP gives an optimal solution, but demandand costs must be linear
Let Wt=workforce size for period t
Pt =units produced in period t
It =units in inventory at the end of period t Ft =number of workers fired for period t
Ht=number of workers hired for period t
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LP MODELMinimize Z = $100 (H1 + H2 + H3 + H4)
+ $500 (F
1 +F
2 +F
3 +F
4)+ $0.50 (I1 + I2 + I3 + I4)
Subject to
P1 - I1 = 80,000 (1)
Demand I1 + P2 - I2 = 50,000 (2)
constraintsI2 +
P3 -
I3 = 120,000 (3)
I3 + P4 - I4 = 150,000 (4)
Production 1000 W1 = P1 (5)
constraints 1000 W2 = P2 (6)
1000 W3 = P3 (7)
1000 W4 = P4 (8)100 + H1 - F1 = W1 (9)
Work force W1 + H2 - F2 = W2 (10)
constraints W2 + H3 - F3 = W3 (11)
W3 + H4 - F4 = W4 (12)
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Transportation Method
1 900 1000 100 500
2 1500 1200 150 5003 1600 1300 200 500
4 3000 1300 200 500
Regular production cost per unit $20
Overtime production cost per unit $25
Subcontracting cost per unit $28
Inventory holding cost per unit per period $3
Beginning inventory 300 units
EXPECTED REGULAR OVERTIME SUBCONTRACT
QUARTER DEMAND CAPACITY CAPACITY CAPACITY
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Transportation Tableau
UnusedPERIOD OF PRODUCTION 1 2 3 4 Capacity Capacity
Beginning 0 3 6 9
Inventory 300 300
Regular 600 300 100 1000
Overtime 100 100
Subcontract 500
Regular 1200 1200
Overtime 150 150
Subcontract 250 250 500
Regular 1300 1300
Overtime 200 200
Subcontract 500 500
Regular 1300 1300
Overtime 200 200
Subcontract 500 500
Demand 900 1500 1600 3000 250
1
2
3
4
PERIOD OF USE
20 23 26 29
25 28 31 34
28 31 34 37
20 23 26
25 28 31
28 31 34
20 23
25 28
28 31
20
25
28
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Copyright 2006 John Wiley & Sons, Inc. 13-19
Burruss Production Plan
1 900 1000 100 0 5002 1500 1200 150 250 600
3 1600 1300 200 500 1000
4 3000 1300 200 500 0
Total 7000 4800 650 1250 2100
REGULAR SUB- ENDINGPERIOD DEMAND PRODUCTION OVERTIME CONTRACT INVENTORY
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Copyright 2006 John Wiley & Sons, Inc. 13-20
Other Quantitative Techniques
Linear decision rule (LDR)
Search decision rule (SDR)
Management coefficients model
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Copyright 2006 John Wiley & Sons, Inc. 13-21
Hierarchical Nature of Planning
Items
Product linesor families
Individualproducts
Components
Manufacturingoperations
Resource
Level
Plants
Individualmachines
Criticalworkcenters
Production
Planning
Capacity
Planning
Resourcerequirements
plan
Rough-cutcapacityplan
Capacityrequirements
plan
Input/outputcontrol
Aggregateproduction
plan
Masterproductionschedule
Materialrequirements
plan
Shopfloor
schedule
Allwork
centers
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Copyright 2006 John Wiley & Sons, Inc. 13-22
Available-to-Promise (ATP)
Quantity of items that can bepromised to the customer
Difference between plannedproduction and customer ordersalready received
AT in period 1 = (On-hand quantity + MPS in period 1)
- (CO until the next period of planned production)ATP in period n = (MPS in period n)
- (CO until the next period of planned production)
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Copyright 2006 John Wiley & Sons, Inc. 13-23
ATP: Example
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Copyright 2006 John Wiley & Sons, Inc. 13-24
ATP: Example (cont.)
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Copyright 2006 John Wiley & Sons, Inc. 13-25
ATP: Example (cont.)
ATP in April = (10+100) 70 = 40
ATP in May = 100 110 = -10ATP in June = 100 50 = 50
= 30
= 0
Take excess units from April
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Copyright 2006 John Wiley & Sons, Inc. 13-26
Rule Based ATPProductRequest
Is the productavailable at
this location?
Is an alternativeproduct available
at an alternatelocation?
Is an alternativeproduct availableat this location?
Is this productavailable at a
differentlocation?
Available-to-promise
Allocateinventory
Capable-to-promise date
Is the customerwilling to wait for
the product?
Available-to-promise
Allocateinventory
Revise masterschedule
Trigger production
Lose sale
Yes
No
Yes
No
Yes
No
Yes
No
Yes
No
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Copyright 2006 John Wiley & Sons, Inc. 13-27
Aggregate Planning for Services
1. Most services cant be inventoried
2. Demand for services is difficult to predict
3. Capacity is also difficult to predict
4. Service capacity must be provided at theappropriate place and time
5. Labor is usually the most constrainingresource for services
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Copyright 2006 John Wiley & Sons, Inc. 13-28
Yield Management
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Copyright 2006 John Wiley & Sons, Inc. 13-29
Yield Management (cont.)
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Copyright 2006 John Wiley & Sons, Inc. 13-30
Yield Management: Example
NO-SHOWS PROBABILITY P(N< X)
0 .15 .00
1 .25 .15
2 .30 .40
3 .30 .70
Optimal probability of no-shows
P(n< x) = = .517Cu
Cu + Co
75
75 + 70
.517
Hotel should be overbooked by two rooms
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Copyright 2006 John Wiley & Sons, Inc.All rights reserved. Reproduction or translation of this
work beyond that permitted in section 117 of the 1976United States Copyright Act without express permissionof the copyright owner is unlawful. Request for furtherinformation should be addressed to the Permission
Department, John Wiley & Sons, Inc. The purchasermay make back-up copies for his/her own use only andnot for distribution or resale. The Publisher assumes noresponsibility for errors, omissions, or damages causedby the use of these programs or from the use of the
information herein