Aggregate Planning

and S&OP

2014
2014
Pearson
Pearson
Education,
Education,
Inc.Inc.

13 - 1

Outline

Global Company Profile:

Frito-Lay

The Planning Process

Sales and Operations Planning
The Nature of Aggregate Planning
Aggregate Planning Strategies

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Outline - Continued

Methods for Aggregate Planning

Aggregate Planning in Services
Revenue Management

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Learning Objectives
When you complete this chapter you
should be able to:
1. Define sales and operations planning
2. Define aggregate planning
3. Identify optional strategies for
developing an aggregate plan

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Learning Objectives
When you complete this chapter you
should be able to:
4. Prepare a graphical aggregate plan
5. Solve an aggregate plan via the
transportation method
6. Understand and solve a revenue
management problem

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Aggregate Planning at
Frito-Lay

More than three dozen brands, 15 brands

sell more than $100 million annually, 7 sell
over $1 billion

Planning processes covers 3 to 18 months

Unique processes and specially designed

equipment

High fixed costs require high volumes and

high utilization

2014
2014
Pearson
Pearson
Education,
Education,
Inc.Inc.

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Aggregate Planning at
Frito-Lay

Demand profile based on historical sales,

forecasts, innovations, promotion, local
demand data

Match total demand to capacity, expansion

plans, and costs

Quarterly aggregate plan goes to 36

plants in 17 regions

Each plant develops 4-week plan for

product lines and production runs

2014
2014
Pearson
Pearson
Education,
Education,
Inc.Inc.

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The Planning Process

Long-range plans (over one year)
Capacity decisions critical to long range plans
Issues:
Research and Development
New product plans
Capital investments
Facility location/expansion

Figure 13.1

Top
executives

Operations
managers with
sales and
operations
planning team
Operations
managers,
supervisors,
foremen
Responsibility
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Intermediate-range plans (3 to 18 months)

Issues:
Sales and operations planning
Production planning and budgeting
Setting employment, inventory,
subcontracting levels
Analyzing operating plans
Short-range plans (up to 3 months)
Scheduling techniques
Issues:
Job assignments
Ordering
Job scheduling
Dispatching
Overtime
Part-time help
Planning tasks and time horizons
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Sales and Operations Planning

Coordination of demand forecasts with
functional areas and the supply chain
Typically done by cross-functional teams
Determine which plans are feasible
Limitations must be reflected
Provides warning when resources do not
match expectations
Output is an aggregate plan
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S&OP
and the
Aggregate
Plan

Figure 13.2

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Sales and Operations Planning

Decisions must be tied to strategic
planning and integrated with all areas of
the firm over all planning horizons
S&OP is aimed at
1. The coordination and integration of the
internal and external resources necessary
for a successful aggregate plan
2. Communication of the plan to those charged
with its execution
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Sales and Operations Planning

Requires
A logical overall unit for measuring sales and
output
A forecast of demand for an intermediate
planning period in these aggregate terms
A method for determining relevant costs
A model that combines forecasts and costs so
that scheduling decisions can be made for the
planning period
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Aggregate Planning
The objective of aggregate planning
is usually to meet forecast demand
while minimizing cost over the
planning period

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Aggregate Planning
QUARTER 1
Jan.

Feb.

March

150,000

120,000

110,000

QUARTER 2
April

May

June

100,000

130,000

150,000

QUARTER 3
July

Aug.

Sept.

180,000

150,000

140,000

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Aggregate Planning
Combines appropriate resources into
general terms
Part of a larger production planning
system
Disaggregation breaks the plan
down into greater detail
Disaggregation results in a master
production schedule
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Aggregate Planning Strategies

1. Should inventories be used to absorb
changes in demand?
2. Should changes be accommodated by
varying the size of the workforce?
3. Should part-timers, overtime, or idle time be
used to absorb changes?
4. Should subcontractors be used and
maintain a stable workforce?
5. Should prices or other factors be changed to
influence demand?
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Capacity Options
1. Changing inventory levels
Increase inventory in low demand periods to
meet high demand in the future
Increases costs associated with storage,
insurance, handling, obsolescence, and
capital investment
Shortages may mean lost sales due to long
lead times and poor customer service

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Capacity Options
2. Varying workforce size by hiring or layoffs
Match production rate to demand
Training and separation costs for hiring and
laying off workers
New workers may have lower productivity
Laying off workers may lower morale and
productivity

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Capacity Options
3. Varying production rates through
overtime or idle time
Allows constant workforce
May be difficult to meet large increases in
demand
Overtime can be costly and may drive down
productivity
Absorbing idle time may be difficult

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Capacity Options
4. Subcontracting
Temporary measure during periods of peak
demand
May be costly
Assuring quality and timely delivery may be
difficult
Exposes your customers to a possible
competitor

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Capacity Options
5. Using part-time workers
Useful for filling unskilled or low skilled
positions, especially in services

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Demand Options
1. Influencing demand
Use advertising or promotion to increase
demand in low periods
Attempt to shift
demand to slow
periods
May not be
sufficient to
balance demand
and capacity
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Demand Options
2. Back ordering during high-demand
periods
Requires customers to wait for an order
without loss of goodwill or the order
Most effective when there are few if any
substitutes for the product or service
Often results in lost sales

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Demand Options
3. Counterseasonal product and service
mixing
Develop a product mix of counterseasonal
items
May lead to products or services outside the
companys areas of expertise

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Aggregate Planning Options

TABLE 13.1 Aggregate Planning Options
OPTION

ADVANTAGES

DISADVANTAGES

COMMENTS

Changing
inventory
levels

Changes in
human resources
are gradual or
none; no abrupt
production
changes.

Inventory holding
cost may increase.
Shortages may
result in lost sales.

Applies mainly to
production, not
service,
operations.

Varying
workforce
size by
hiring or
layoffs

Avoids the costs

of other
alternatives.

Hiring, layoff, and

training costs may
be significant.

Used where size

of labor pool is
large.

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Aggregate Planning Options

TABLE 13.1 Aggregate Planning Options
OPTION

ADVANTAGES

DISADVANTAGES

COMMENTS

Varying
production
rates
through
overtime or
idle time

Matches seasonal Overtime premiums;

fluctuations
tired workers; may
without hiring/
not meet demand.
training costs.

Allows flexibility
within the
aggregate plan.

Subcontracting

Permits flexibility
and smoothing of
the firms output.

Applies mainly in
production
settings.

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Loss of quality
control; reduced
profits; loss of future
business.

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Aggregate Planning Options

TABLE 13.1 Aggregate Planning Options
OPTION

ADVANTAGES

Using parttime
workers

Is less costly and

more flexible than
full-time workers.

High turnover/
training costs;
quality suffers;
scheduling difficult.

Good for
unskilled jobs in
areas with large
temporary labor
pools.

Influencing
demand

Tries to use
excess capacity.
Discounts draw
new customers.

Uncertainty in
demand. Hard to
match demand to
supply exactly.

Creates
marketing ideas.
Overbooking
used in some
businesses.

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DISADVANTAGES

COMMENTS

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Aggregate Planning Options

TABLE 13.1 Aggregate Planning Options
OPTION

ADVANTAGES

DISADVANTAGES

COMMENTS

Back
May avoid
ordering
overtime. Keeps
during high- capacity constant.
demand
periods

Customer must be
willing to wait, but
goodwill is lost.

Many companies
back order.

CounterFully utilizes
seasonal
resources; allows
product and stable workforce.
service
mixing

May require skills or

equipment outside
the firms areas of
expertise.

Risky finding
products or
services with
opposite demand
patterns.

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Mixing Options to Develop a Plan

A mixed strategy may be the best way
to achieve minimum costs
There are many possible mixed
strategies
Finding the optimal plan is not always
possible

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Mixing Options to Develop a Plan

Chase strategy
Match output rates to demand forecast for
each period
Vary workforce levels or vary production
rate
Favored by many service organizations

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Mixing Options to Develop a Plan

Level strategy
Daily production is uniform
Use inventory or idle time as buffer
Stable production leads to better quality
and productivity

Some combination of capacity options,

a mixed strategy, might be the best
solution
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Methods for Aggregate Planning

Graphical Methods
Popular techniques
Easy to understand and use
Trial-and-error approaches that do not
guarantee an optimal solution
Require only limited computations

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Graphical Methods
1. Determine the demand for each period
2. Determine the capacity for regular time,
overtime, and subcontracting each period
3. Find labor costs, hiring and layoff costs,
and inventory holding costs
4. Consider company policy on workers and
stock levels
5. Develop alternative plans and examine
their total cost
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Roofing Supplier Example 1

TABLE 13.2

Monthly Forecasts

MONTH

EXPECTED
DEMAND

Jan

900

22

41

Feb

700

18

39

Mar

800

21

38

Apr

1,200

21

57

May

1,500

22

68

June

1,100

20

55

6,200

124

Average
requirement

PRODUCTION
DAYS

DEMAND PER
DAY (COMPUTED)

Total expected demand

= Number of production days
6,200
=
= 50 units per day
124

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Roofing Supplier Example 1

Production rate per working day

Forecast demand

Figure 13.3

70
60

Level production using average

monthly forecast demand

50
40
30

0
Jan

Feb

Mar

Apr

May

June

22

18

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21

21

22

20

= Month
= Number of
working days
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Roofing Supplier Example 2

TABLE 13.3

Cost Information

Inventory carrying cost

$ 5 per unit per month

Subcontracting cost per unit

$20 per unit

Average pay rate

$10 per hour ($80 per day)

Overtime pay rate

$17 per hour

(above 8 hours per day)

Labor-hours to produce a unit

1.6 hours per unit

Cost of increasing daily production rate

(hiring and training)

$300 per unit

Cost of decreasing daily production rate

(layoffs)

$600 per unit

Pla
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Roofing Supplier Example 2

MONTH

PRODUCTION
DAYS

PRODUCTION
AT 50 UNITS
PER DAY

Jan

22

1,100

900

+200

200

Feb

18

900

700

+200

400

Mar

21

1,050

800

+250

650

Apr

21

1,050

1,200

150

500

May

22

1,100

1,500

400

100

June

20

1,000

1,100

100

DEMAND
FORECAST

MONTHLY
INVENTORY
CHANGE

ENDING
INVENTORY

1,850

Total units of inventory carried over from one

month to the next = 1,850 units
Workforce required to produce 50 units per day = 10 workers
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Roofing Supplier Example 2

COST

PRODUCTION
MONTH
DAYS
Inventory
carrying

Jan

22

Feb
18
Regular-time
labor
Mar

21

Apr
21
Other
costs (overtime,
May layoffs, 22
hiring,
subcontracting)
June
20

Total cost

PRODUCTION
MONTHLY
CALCULATIONS
AT 50 UNITS
DEMAND
INVENTORY
ENDING
PER$9,250
DAY
FORECAST
CHANGE
(= 1,850 units
carried xINVENTORY
$5 per

1,100
900
99,200
1,050

unit)
900

+200

200

700workers+200
400
(= 10
x $80 per day
x
800
650
124
days) +250

1,050

1,200

150

500

1,100

1,500

400

100

1,100

100

0
$108,450
1,000

1,850

Total units of inventory carried over from one

month to the next = 1,850 units
Workforce required to produce 50 units per day = 10 workers
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Roofing Supplier Example 3

In-house production

= 38 units per day

x 124 days
= 4,712 units

Subcontract units = 6,200 4,712

= 1,488 units
COST
Regular-time labor
Subcontracting
Total cost

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CALCULATIONS
$75,392 (= 7.6 workers x $80 per day x
124 days)
29,760 (= 1,488 units x $20 per unit)
$105,152

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Roofing Supplier Example 3

Production rate per working day

Forecast demand

70
60

Level production
using lowest
monthly forecast
demand

50
40
30

0
Jan

Feb

Mar

Apr

May

June

22

18

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21

21

22

20

= Month
= Number of
working days
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Roofing Supplier Example 4

TABLE 13.4

Cost Computations for Plan 3

BASIC
PRODUCTION
COST
(DEMAND X 1.6
HRS/UNIT X
$10/HR)

EXTRA COST OF
INCREASING
PRODUCTION
(HIRING COST)

EXTRA COST OF
DECREASING
PRODUCTION
(LAYOFF COST)

$1,200
(= 2 x $600)

12,400

MONTH

FORECAST
(UNITS)

DAILY
PROD
RATE

Jan

900

41

Feb

700

39

Mar

800

38

12,800

$600
(= 1 x $600)

13,400

Apr

1,200

57

19,200

$5,700
(= 19 x
$300)

24,900

May

1,500

68

24,000

$3,300
(= 11 x
$300)

24,300

June

1,100

55

17,600

$7,800
(= 13 x
$600)

25,400

$99,200

$9,000

$9,600

$117,800

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$ 14,400
11,200

TOTAL
COST
$ 14,400

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Production rate per working day

Roofing Supplier Example 4

Forecast demand and
monthly production

70
60
50
40
30

0
Jan

Feb

Mar

Apr

May

June

22

18

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21

21

22

20

= Month
= Number of
working days
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Comparison of Three Plans

TABLE 13.5

Comparison of the Three Plans

COST

PLAN 1

PLAN 2

Inventory carrying

Regular labor

9,250

PLAN 3
0

99,200

75,392

99,200

Overtime labor

Hiring

9,000

Layoffs

9,600

Subcontracting

29,760

$108,450

$105,152

$117,800

Total cost

Plan 2 is the lowest cost option

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Mathematical Approaches
Useful for generating strategies
Transportation Method of Linear Programming
Produces an optimal plan
Works well for inventories, overtime,
subcontracting
Does not work when nonlinear or negative factors
are introduced

Other Models
General form of linear programming
Simulation
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Transportation Method
TABLE 13.6

Farnsworths Production, Demand, Capacity, and Cost Data

SALES PERIOD
MAR.

APR.

MAY

800

1,000

750

Regular

700

700

700

Overtime

50

50

50

150

150

130

Demand
Capacity:

Subcontracting
Beginning inventory

100 tires
COSTS

Regular time

$40 per tire

Overtime

$50 per tire

Subcontracting

$70 per tire

Carrying cost

$ 2 per tire per month

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Transportation Example
Important points
1. Carrying costs are $2/tire/month. If goods are
made in one period and held over to the next,
holding costs are incurred.
2. Supply must equal demand, so a dummy
column called unused capacity is added.
3. Because back ordering is not viable in this
example, cells that might be used to satisfy
earlier demand are not available.
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Transportation Example
4. Quantities in each column designate the
levels of inventory needed to meet demand
requirements
5. In general, production should be allocated to
the lowest cost cell available without
exceeding unused capacity in the row or
demand in the column

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Transportation
Example
SUPPLY FROM

Beginning inventory
P
e
r
i
o
d
1
P
e
r
i
o
d
2
P
e
r
i
o
d
3

Table 13.7
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DEMAND FOR

Period 1
(Mar)

Period 2
(Apr)

2
42

44

52

54

50
72

74

700

150

40

42

X
X
X

0
700

52

50

50
70

Overtime

150

50

Regular time

50
70

Subcontract

0
700

Overtime

Overtime

700

Subcontract

72

50

0
100

150
0

40
700
50

50

700
50

70
Subcontract
TOTAL DEMAND

TOTAL
CAPACITY
AVAILABLE
(supply)
100

50

Regular time

100

40
Regular time

Period 3
(May)

Unused
Capacity
(dummy)

800

1,000

0
130

750

230

130
2,780

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Aggregate Planning in Services

Most services use combination strategies
and mixed plans
Controlling the cost of labor is critical
1. Accurate scheduling of labor-hours to assure
quick response to customer demand
2. An on-call labor resource to cover
unexpected demand
3. Flexibility of individual worker skills
4. Flexibility in rate of output or hours of work
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Five Service Scenarios

Restaurants
1. Smoothing the production process
2. Determining the optimal workforce size

Hospitals
Responding to patient demand

National Chains of Small Service Firms

Planning done at national level and at
local level
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Five Service Scenarios

Miscellaneous Services
Plan human resource requirements
Manage demand

Airline industry
Extremely complex planning problem
Involves number of flights, number of
passengers, air and ground personnel,
allocation of seats to fare classes
Resources spread through the entire system
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Revenue Management
Allocating resources to customers at
prices that will maximize revenue
1. Service or product can be sold in advance of
consumption
2. Demand fluctuates
3. Capacity is relatively fixed
4. Demand can be segmented
5. Variable costs are low and fixed costs are
high
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Revenue Management Example

Room sales

Figure 13.5

Demand
Curve

Potential customers exist who are

willing to pay more than the $15
variable cost of the room, but not
$150

100

Passed-up
contribution
50
Total
$ contribution
= (Price) x
(50
rooms)
= ($150 $15)
x (50)
= $6,750
$15
Variable cost
of room
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Some customers who paid

$150 were actually willing to
pay more for the room

Money left
on the table
$150
Price charged
for room

Price
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Revenue Management Example

Room sales

Figure 13.6

Demand
Curve

100

Total $ contribution =
(1st price) x 30 rooms + (2nd price) x 30 rooms =
($100 - $15) x 30 + ($200 - $15) x 30 =
$2,550 + $5,550 = $8,100

60

30

$15
Variable cost
of room
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$100
Price 1
for room

$200
Price 2
for room

Price
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Revenue Management Approaches

Airlines, hotels, rental cars, etc.
Tend to have predictable duration of service
and use variable pricing to control availability
and revenue

Movies, stadiums, performing arts centers

Tend to have predicable duration and fixed
prices but use seating locations and times to
manage revenue

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Revenue Management Approaches

Restaurants, golf courses, ISPs
Generally have unpredictable duration of
customer use and fixed prices, may use offpeak rates to shift demand and manage
revenue

Health care businesses, etc.

Tend to have unpredictable duration of
service and variable pricing, often attempt to
control duration of service
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Making Revenue Management

Work
1. Multiple pricing structures must be
feasible and appear logical to the
customer
2. Forecasts of the use and duration of
use
3. Changes in demand

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Thank you

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