Aggregate Planning

Sales and operations planning (S&OP): A process of balancing resources and forecasted
demand, while linking strategic planning with operations over all planning horizons.
S&OP receives input from a variety of sources both internal and external to the firm. Because of
the diverse inputs, S&OP is typically done by cross-functional teams that align the competing
constraints.
The output of S&OP is called an aggregate plan. The aggregate plan is concerned with
determining the quantity and timing of production for the intermediate future, often from 3 to
18 months ahead.
Aggregate plans use information regarding product families or product lines rather than
individual products.
An S&OP team builds an aggregate plan that satisfies forecasted demand by adjusting
production rates, labor levels, inventory levels, overtime work, subcontracting rates, and other
controllable variables.

Relationships of S&OP and the Aggregate Plan

In a manufacturing environment, the process of breaking the aggregate plan down into greater
detail is called disaggregation. Disaggregation results in a master production schedule,
which provides input to material requirements planning (MRP) systems.
Aggregate Planning Options:

Eight options exist:

• The first five are called capacity options because they do not try to change demand but
attempt to absorb demand fluctuations.
• The last three are demand options through which firms try to smooth out changes in the
demand pattern over the planning period.

Capacity Options

1. Changing inventory levels:

• Costs associated with storage, insurance, handling, obsolescence, pilferage, and
capital invested will increase.
2. Varying workforce size by hiring or layoffs:
• Hiring new employees need to be trained, and productivity drops temporarily as they
are absorbed into the workforce.
• Layoffs or terminations, of course, lower the morale of all workers and also lead to
lower productivity.
3. Varying production rates through overtime or idle time:
• There is a limit on how much overtime is realistic.
• Overtime pay increases costs, and too much overtime can result in worker fatigue
and a drop in productivity. Overtime also implies added overhead costs to keep a
facility open.
4. Subcontracting:
• Subcontracting has several pitfalls. First, it may be costly; second, it risks opening
the door to a competitor. Third, developing the perfect subcontract supplier can be a
challenge.
5. Using part-time workers:
• Especially in the service sector, part-time workers can fill labor needs. This practice
is common in restaurants, retail stores, and supermarkets.

Demand Options

6. Influencing demand:
• When demand is low, a company can try to increase demand through advertising,
promotion, personal selling, and price cuts. Airlines and hotels have long offered
weekend discounts and off-season rates; theaters cut prices for matinees.
7. Back ordering during high-demand periods:
• Are orders for goods or services that a firm accepts but is unable (either on purpose
or by chance) to fill at the moment.
• If customers are willing to wait without loss of their goodwill or order, back ordering is
a possible strategy. Many firms back order, but the approach often results in lost
sales.
8. Counterseasonal product and service mixing:
• Examples include companies that make both furnaces and air conditioners
• Companies that follow this approach may find themselves involved in products or
services beyond their area of expertise or beyond their target market.
Aggregate Planning Strategies (Mixing Options to Develop a Plan):

Involve the manipulation of inventory, production rates, labor levels, capacity, and other
controllable variables.

Chase Strategy:

A chase strategy typically attempts to achieve output rates for each period that match the
demand forecast for that period. This strategy can be accomplished in a variety of ways.

• Vary workforce levels by hiring or laying off

• Vary output by means of overtime, idle time, part-time employees, or subcontracting.

Level Strategy:

A level strategy (or level scheduling) is an aggregate plan in which production is uniform
from period to period.

Firms like Toyota and Nissan attempt to keep production at uniform levels and may (1) let the
finished-goods inventory vary to buffer the difference between demand and production or (2)
find alternative work for employees.

Their philosophy is that a stable workforce leads to a better-quality product, less turnover and
absenteeism, and more employee commitment to corporate goals.

Mixed strategy:

For most firms, neither a chase strategy nor a level strategy is likely to prove ideal, so a
combination of the eight options (called a mixed strategy) must be investigated to achieve
minimum cost.

Methods for Aggregate Planning:

1. Graphical Methods

Graphical techniques are popular because they are easy to understand and use. Following
are the five steps in the graphical method:

1. Determine the demand in each period.

2. Determine 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 that may apply to the workers or to stock levels.
5. Develop alternative plans and examine their total costs.

2. The Transportation Method of Linear Programming

When an aggregate planning problem is viewed as one of allocating operating capacity to

meet forecast demand, it can be formulated in a linear programming format. The
transportation method of linear programming is not a trial-and-error approach like graphing
but rather produces an optimal plan for minimizing costs. It is also flexible in that it can
specify regular and overtime production in each time period, the number of units to be
subcontracted, extra shifts, and the inventory carryover from period to period.
Example: Aggregate Planning for A Roofing Supplier

A Juarez, Mexico, manufacturer of roofing supplies has developed monthly forecasts for a
family of products. Data for the 6-month period January to June are presented in Table 13.2.
The firm would like to begin development of an aggregate plan.

TABLE 13.2 Monthly Forecasts

Month Expected Demand Production Days Demand Per Day

(Computed)
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

Table 13.3 provides cost information necessary for analyzing alternatives.

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 $300 per unit
(hiring and training)
Cost of decreasing daily production rate $600 per unit
(layoffs)
• One possible strategy (call it plan 1) for the manufacturer described in Example 1 is to
maintain a constant workforce throughout the 6-month period.
• A second (plan 2) is to maintain a constant workforce at a level necessary to meet the
lowest demand month (March) and to meet all demand above this level by
subcontracting.
• Both plan 1 and plan 2 have level production and are, therefore, called level strategies.
• Plan 3 is to hire and lay off workers as needed to produce exact monthly requirements - a
chase strategy.

Plan 1 for the roofing supplier—a constant workforce:

Here we assume that 50 units are produced per day and that we have a constant workforce,
no overtime or idle time, no safety stock, and no subcontractors. The firm accumulates
inventory during the slack period of demand, January through March, and depletes it during
the higher-demand warm season, April through June. We assume beginning inventory =
0and planned ending inventory = 0.
Plan 2 for the roofing supplier: use of subcontractors within a constant workforce:

Although a constant workforce is also maintained in plan 2, it is set low enough to meet
demand only in March, the lowest demand-per-day month. To produce 38 units per day
(800/21) in-house, 7.6 workers are needed. (You can think of this as 7 full-time workers and 1
part-timer.) All other demand is met by subcontracting. Subcontracting is thus required in
every other month. No inventory holding costs are incurred in plan 2.
Plan 3 for the roofing supplier: hiring and layoffs:

The final strategy, plan 3, involves varying the workforce size by hiring and layoffs as
necessary. The production rate will equal the demand, and there is no change in production
from the previous month, December.
Aggregate Planning in Services:

Revenue Management:

Revenue (or yield) management is the aggregate planning process of allocating the company’s
scarce resources to customers at prices that will maximize revenue.

Popular use of the technique dates to the 1980s, when American Airlines’s reservation system
(called SABRE) allowed the airline to alter ticket prices, in real time and on any route, based on
demand information.

• If it looked like demand for expensive seats was low, more discounted seats were
offered.
• If demand for full-fare seats was high, the number of discounted seats was reduced.

Revenue management in the hotel industry began in the late 1980s at Marriott International,
which now claims an additional $400 million a year in profit from its management of revenue.

The competing Omni hotel chain uses software that performs more than 100,000 calculations
every night at each facility. The Dallas Omni, for example, charges its highest rates on
weekdays but heavily discounts on weekends.

Organizations that have perishable inventory , such as airlines, hotels, car rental agencies,
cruise lines, and even electrical utilities, have the following shared characteristics that make
yield management of interest:

1. Service or product can be sold in advance of consumption

2. Fluctuating demand
3. Relatively fixed resource (capacity)
4. Segmentable demand
5. Low variable costs and high fixed costs

▶ 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
▶ Restaurants, golf courses, ISPs
• Generally have unpredictable duration of customer use and fixed prices, may
use “off-peak” 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