Ch13 aggregate planning

how to deal with demand fluctuations ?

demand based options

• reactive : using finished goods inventory or backorders (eg inventory)

• proactive : shifting demand patterns through incentives (eg yield management)

capacity based options :

• overtime or undertime

• hiring / firing

• subcontracting

each approach has specific advantages and disadvanatges → evaluate the company’s current situation + magnitude and duration of the change

types of agregate plans : level aggregate plan

maintains a constant workforce

capacity of labor and equipment is based on average demand

• advantage : same amount produced in each period

• disadvantage : risk of inventory build-up and or back orders

often used for make-to-stock products (eg stereos, kitchen appliances, hardware)

types of agregate plans : chase aggregate plan

produces the amount needed in each period

capacity of labor and equipment are adapted based on period demands

• advantage : min holding costs for finished goods

• disadvantage : risk of excess capacity in off-peak demand periods, expensive short-term capacity changes

often used for make-to-order products (eg custom cabinets, specialpurpose equipment, one of a kind items, highly perishable products)

types of agregate plans : hybrid aggregate plan

any combination of options, based on the company’s current situation (eg level strategy with avoidance of backorders)

developing the aggregate plan

1) choose the type of plan that matches the company’s objective - level, chase, hybrid

2) determine the aggregate production rate

• average demand over all periods vs actual demand per period

3) determine the size of the workforce

4) calculate all required information

• inventory and shortages, employees hired and fired, overtime,

5) evaluate the plan’s performance

• total costs,

• other considerations : customer service, human resources, operations

sales and operations planning (S&OP) affects the whole organization and its supply chain

• finance prefers to reduce inventory levels and improve cash flow

• marketing prefers to increase inventory levels to improve customer service

• operations prefers to level demand peaks for capacity reaosns

• human resources monitor the impact on workforce productivity and satisfacton

• sypply chain partners prefer stable order/ delivery quantities to avoid uncertainty

→ sales and operation planning might have to be finetuned several times before it is accepted

→ S&OP needs to be flexible to deal with changhing circumstances

aggregate planning in services

building up inventory is not possible for nontangible products

→ chase aggregate plan : no impact

→ level aggregate plan : capacity of labor and equipment must allow to meet peak demand to avoid lost sales

note that back orders are (in some cases) still possible, although they might be undesirable

aggregate planning in services : labor cost is often very critcal and can be controlled by

• accurately scheduling labor hours to respond to demand

• having an on-call labor pool to meet unexpected demand

• having multi-skilled workers who can perform different tasks

• having flexible work hours to meet changing demand