Chapter 12 With Woodruff
Modification
Sales and Operations Planning –
Aggregate Planning
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objectives
• Understand what sales and operations
planning is and how it coordinates
manufacturing, logistics, service, and
marketing plans.
• Construct aggregate plans that employ
different strategies for meeting demand.
• Describe what yield management is
and why it is an important strategy for
leveling demand.
12-2
Additional Objective
• Understand how Aggregate Planning
and Disaggregation fit in Planning
Systems
12-3
What is Sales and Operations Planning?
• Sales and operations planning is a process
that helps firms provide better customer
service, lower inventory, shorten customer
lead times, stabilize production rates, and
give top management a handle on the
business
• The process consists of a series of meetings,
finishing with a high-level meeting where key
intermediate-term decisions are made
• This must occur at an aggregate level and
also at the detailed individual product level
– By aggregate we mean at the level of major groups
of products
12-4
Overview of Major Operations and Supply
Planning Activities
12-5
Overview of Sales and Operations
Planning Activities
• Sales and operations planning was
coined by companies to refer to
aggregate planning
• The new terminology is meant to
capture the importance of crossfunctional work
• Aggregation on the supply side is done
by product families, and on the demand
side it is done by groups of customers
12-6
Types of Planning
• Long-range planning: planning focusing on
a horizon greater than one year
– Generally is done annually
• Intermediate-range planning: planning
focusing on a period from 3 to 18 months
– Time increments that are weekly, monthly, or
quarterly
• Short-range planning: planning covering a
period from one day to six months
– Daily or weekly time increments
12-7
The Aggregate Operations Plan
• 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
12-8
Production Planning Environment
• In general, the external environment is
outside the production planner’s direct
control
– In some firms, demand can be managed
• Complementary products work for firms
facing cyclical demand fluctuations
• With services, cycles are more often
measured in hours than months
12-9
Production Planning Strategies
1. Chase strategy
•
•
Match the production rate by hiring and laying off
employees
Must have a pool of easily trained applicants to
draw on
2. Stable workforce—variable work hours
•
Vary the number of hours worked through flexible
work schedules or overtime
3. Level strategy
•
Demand changes are absorbed by fluctuating
inventory levels, order backlogs, and lost sales
12-10
Production Planning Strategies Continued
• Pure strategy: when just one of these
approaches is used to absorb demand
fluctuations
• Mixed strategy: when two or more of the
approaches are used
• In addition to these strategies, managers also
may choose to subcontract some portion of
production
– Similar to the chase strategy, but hiring and laying
off are translated into subcontracting
12-11
Relevant Costs
1. Basic production costs
•
The fixed and variable costs incurred in
producing a given product type in a given
time period
2. Costs associated with changes in the
production rate
•
Hiring, training, and laying off personnel
3. Inventory holding costs
4. Backorder costs
12-12
Aggregate Planning Techniques
• Cut-and-try approach
– Involves costing out various production
planning alternatives and selecting the one
that is best
– Elaborate spreadsheets are developed to
facilitate the decision process
• Linear programming
• Simulation
12-13
A Cut-and-Try Example: The JC Company
12-14
More Data
• In solving this problem, we can exclude
the material costs
• Inventory at the beginning of the first
period is 400 units
• Assume the safety stock should be
one-quarter of the demand forecast
The JC Company
12-15
Aggregate Production Planning
Requirements
1,800  0.25  450
1,800  450  400
1,850  400  1,800
The JC Company
12-16
Four Plans to Investigate
1. Produce to exact monthly production
requirements by varying workforce size
2. Produce to meet expected average demand
by maintaining a constant workforce
3. Produce to meet the minimum expected
demand using a constant workforce and
subcontract to meet additional requirements
4. Produce to meet expected demand for all
but the first two months using a constant
workforce and use overtime to meet
additional output requirements
The JC Company
12-17
Production Plan 1: Exact Production;
Vary Workforce
The JC Company
12-18
Production Plan 2: Constant Workforce;
Vary Inventory and Stockout
The JC Company
12-19
Production Plan 3: Constant Low
Workforce; Subcontract
The JC Company
12-20
Production Plan 4: Constant Workforce;
Overtime
The JC Company
12-21
Comparison of Four Plans
The JC Company
12-22
Four Plans for Satisfying a Production
Requirement
The JC Company
12-23
Level Scheduling
• A level schedule holds production
constant over a period of time
• It is something of a combination of the
strategies we have mentioned here
• For each period, it keeps the workforce
constant and inventory low, and
depends on demand to pull products
through
12-24
Advantages of Level Scheduling
1. The entire system can be planned to
minimize inventory and work-in-process
2. Product modifications are up-to-date
because of the low amount of work-inprocess
3. There is a smooth flow throughout the
production system.
4. Purchased items from vendors can be
delivered when needed, often directly to the
production line
12-25
Requirements to Use Level Scheduling
1. Production should be repetitive (assemblyline format)
2. The system must contain excess capacity
3. Output of the system must be fixed for a
period of time
4. There must be a smooth relationship among
purchasing, marketing, and production
5. The cost of carrying inventory must be high
6. Equipment costs must be low
7. The workforce must be multi-skilled
12-26
The Ugly Side of Aggregate Planning
• Aggregation is often from market
segments through “SKUs” to Families
• Disaggregation is needed to Population
the master schedule
12-27
Yield Management
• Yield management: the process of allocating
the right type of capacity to the right type of
customer at the right price and time to
maximize revenue or yield
– Can be a powerful approach to making demand
more predictable
• Has existed as long as there has been limited
capacity for serving customers
• Its widespread scientific application began
with American Airlines’ computerized
reservation system (SABRE)
12-28
Yield Management Most Effective When…
1. Demand can be segmented by
customer
2. Fixed costs are high and variable
costs are low
3. Inventory is perishable
4. Product can be sold in advance
5. Demand is highly variable
12-29
Yield Management at a Hotel
• Hotels offer one set of rates during the week
and another set during the weekend
• The variable costs associated with a room are
low in comparison to the cost of adding rooms
to the property
• Available rooms cannot be transferred from
night to night
• Blocks of rooms can be sold to conventions or
tours
• Potential guests may cut short their stay or
not show up at all
12-30
Operating Yield Management Systems
• Pricing structures must appear logical to the
customer and justify the different prices
• Must handle variability in arrival or starting
times, duration, and time between customers
• Must be able to handle the service process
• Must train employees to work in an
environment where overbooking and price
changes are standard occurrences that
directly impact the customer
• The essence of yield management is the
ability to manage demand
12-31
Price/Service Duration Matrix: Positioning
of Selected Service Industries
12-32
Simple Overbooking Formula
Use the following newsperson formula to
pick B, which is the number to overbook:
P(NS >= B) >= S / (U + S)
NS is number of no shows, U gives cost
of Unused capacity (opportunity) and S
the Shortage cost (actual plus loss of
goodwill)
12-33