Operations management

Sales and Aggregate Planning

Krishna Murari

Sales and Aggregate Planning

The first step in translating long range strategic plans down to operational level is the development of aggregate plan. Aggregate planning is an intermediate or medium range planning tool addressing the requirements of product lines including labour. Goal of aggregate plan is to match demand with firms ability to supply the product at minimum cost.

SALES AND OPERATIONS PLANNING

Sales and Operations Planning in OM

Operations As a Competitive Process Strategy Weapon Process Analysis Operations Strategy Process Project Management

Performance and Quality Constraint Management Process Layout Lean Systems

Supply Chain Strategy Location Inventory Management Forecasting Sales and Operations Planning Resource Planning Scheduling

 Whirlpool begins production of room air conditioners in

the fall and holds them as inventory until they are shipped in the spring. Building inventory in the slack season allows the company to even out production rates over much of the year and still satisfy demand in the peak periods. However, when summers are hotter than usual, demand increases dramatically and stockouts can occur. If Whirlpool increases its output and the summer is hot, it stands to increase its sales and market share. But if the summer is cool, the company is stuck with expensive inventories. Whirlpool prefers to make its production plans based on the average year, taking into account industry forecasts for total sales and traditional seasonality.

Planning at Whirlpool

Time Dimensions of Planning

Long range planning time horizon 5

to 10 years for industries requires many years to plan and construct (refineries), 2 to 5 years for others who can expand capacity fast. Yearly review. Medium range planning 6 to 18 months. Reviewed and updated quarterly. Aggregate planning is part of this planning Short range planning one day to six month with weekly review.

Aggregation Plan
Organsiations estimate resource requirements
to satisfy the market demand. It is easy to plan single product but for multiple product it becomes difficult and requires common measure for identifying the requirements by making product group. The aggregate plan defines the best combination of workforce level, inventory on hand and production rate that matches the companys resources to market demand. Once aggregate plans are finalized, they are disaggregated into small tasks. Master production schedules are made by disaggregating the operations.

Aggregate Sales and Operations Planning

Sales and operations planning (S&OP):
The process of planning future aggregate resource levels so that supply is in balance with demand. Staffing plan: A sales and operations plan of a service firm, which centers on staffing and other human resourcerelated factors. Production plan: A sales and operations plan of a manufacturing firm, which centers on production rates and inventory holdings.

Relationship between Sales and Operations Plans and Other plans

A financial assessment of an

organizations near future (1 or 2 years ahead) is called either a business plan (in profit firms) or an annual plan (in nonprofit services). Business plan: A projected statement of income, costs, and profits. Annual plan or financial plan: A plan for financial assessment used by a nonprofit service organization.

Relationship between Sales and Operations Plans and Other plans

The Decision Context

Information inputs to aggregate
Sales and Operations plans Business or Annual plan Operations Strategy Capacity Constraints Demand Forecast

Objectives of Aggregate Plan

Six objectives usually are considered during development of a plan:

1. 2. 3. 4. 5. 6.

Minimize Costs/Maximize Profits Maximize Customer Service Minimize Inventory Investment Minimize Changes in Production Rates Minimize Changes in Workforce Levels Maximize Utilization of Plant and Equipment

Considerations for Aggregate planning Process

Aggregate planning provides primary link between long range and short range planning activities. It specifies monthly or quarterly output requirements by major product groups in labour hours or units of production for up to 18 months. It seeks to find out the combination of monthly and quarterly work force and inventory level to reduce the total production related cost while meeting the forecasted demand.

Considerations for Aggregate planning Process

Basic consideration for developing aggregate plan are

Concept of aggregation Goals of aggregate planning Forecast of aggregate demand Interrelationship among decisions

Concept of Aggregation
Identifying meaningful measure of output is
first step in developing the aggregate plan. It is easy to measure if a firm produces on product but in case of multiple product it is difficult to find common measure to define complete product portfolio. Meaningful measure is found out by identifying groups or families of individual product. Product may be different but follow similar process. Exp: various models of TV made by a factory

Aggregate Planning Goals

It should contain the information on the
required level of output, inventory level and backlogs based on business plan. It should utilise the capacity of the facilities efficiently and usage should be inline with organisations strategy. The companys objectives and policies regarding its employees should be in line with its aggregate plan. E.g. hire and fire policy can not be adopted in case of skilled jobs.

Forecasts of Aggregate Demand

Accurate forecasting helps aggregate planning in delivering better results.

Inter relation ship among the decisions

All the activities in an organisation are interrelated and dependent on each other. Hence future consequences of present decisions should be considered.

Managerial Inputs from Functional Areas to Sales and Operations Plans

Basic Activities for Aggregate planning

a) Item forecasting - this provides an estimate of specific products which on
integrating with aggregate plan become output requirements. b) Master production schedule (MPS) it generates the amounts and dates of specific end products. It is fixed for short run (six to eight weeks). It depends on product , market and resource plans. c) Rough cut capacity planning - includes verifying thats sufficient production and warehouse facilities, equipment and labour are available. And key vendors are allocated adequate capacity to provide materials whenever required.

A Sequential Production Planning

Process
Long-term capacity planning Demand forecasts

Aggregate production planning Master production scheduling Resource requirements planning Necessary modifications Detailed planning and Scheduling (MRP) Implementation Necessary modifications

Planning Strategies
Chase strategy: A strategy that involves hiring
and laying off employees to match the demand forecast. Level-utilization strategy: A strategy that keeps the workforce constant, but varies its utilization to match the demand forecast. Level-inventory strategy: A strategy that relies on anticipation inventories, backorders, and stockouts to keep both the output rate and the workforce constant. Mixed strategy: A strategy that considers and implements a fuller range of reactive alternatives than any one pure strategy.

Reactive Alternatives
Reactive alternatives are actions that can
be taken to cope with demand requirements. Anticipation inventory is inventory that can be used to absorb uneven rates of demand or supply. Workforce adjustment: Hiring and laying off to match demand. Workforce utilization: Use of overtime and under time. Vacation schedules: Use of plant-wide vacation period, vacation blackout periods.

Reactive Alternatives
Subcontracting: Outsourcing to overcome
short-term capacity shortages.

Backlogs, Backorders, and Stock outs:

Backlog: An accumulation of customer orders that have been promised for delivery at some future date. Backorder: A customer order that cannot be filled immediately but is filled as soon as possible. Stockout: An order that is lost and causes the customer to go elsewhere.

Aggressive Alternatives
Aggressive alternatives are actions that
attempt to modify demand and, consequently, resource requirements. Complementary products: Services or products that have similar resource requirements but different demand cycles. Creative Pricing: Promotional campaigns designed to increase sales with creative pricing.

Constraints and Costs

The planner usually considers several types of costs when preparing sales and operations plans. 1. Regular-Time Costs: These costs include regular-time wages plus contributions to benefits, Social Security, retirement funds, and pay for vacations and holidays. 2. Overtime Costs: Overtime wages typically are 150 percent of regular-time wages. 3. Hiring and Layoff Costs: Include the costs of advertising jobs, interviews,training programs, exit interviews, severance pay, and lost productivity. 4. Inventory Holding Costs 5. Backorder and Stockout Costs

Aggregate Planning Techniques

Graphical method for Aggregate output planning Optimal Models for aggregate planning *Linear programming simplex and transportation method *Linear decision rules *Heuristic model Computer Search models Computer Simulation in capacity evaluation Decision tree analysis used in long term capacity evaluation.

Aggregate Planning Techniques

Graphical method for Aggregate output planning : This is two dimensional model relating cumulative demand to cumulative output capacity. It is used to develop and evaluate various alternative plans and identify the best plan through trial and error. The steps are : i) Draw a graph by taking cumulative production days for the planning period on x-axis and cumulative output on y-axis. ii) Plot cumulative demand forecast for the entire planning time period.

Aggregate Planning Techniques

Graphical method for Aggregate output planning : iii) Select a planning strategy based on the aggregate planning goals. iv) Compute proposed output for each period in the planning horizon. Plot on the same axis used to plot the demand. v) Compare the planned output with expected demand and identify the excess inventory and shortages. vi) Calculate the cost involved in implementation. vii) Modify the plan to meet aggregate planning goals by following above steps from step iii to vi.

Aggregate Planning Techniques

Graphical method planning : for Aggregate output

Cumulative output

Unit of output

Cumulative Demand Excess demand

Inventory Accumulation

Productive days in planning horizon

Aggregate Planning Techniques

Linear Programming : This is one of the optimal models used to formulate aggregate plans. The optimal plan for minimizing costs is identified by linear programming procedure. The number of units to be produced, the total number of shifts for plan and amount of inventory are specified. It is used to allocate scare resources to strategic alternatives when the costs are linear functions of their quantities. Optimal solutions are derived using simplex and transportation methods.

Aggregate Planning Techniques

Linear Decision Rules (LDRs): These are set of equations for calculating the optimal workforce, aggregate output rate and inventory level. Non-linear relationships are also considered. The equations are tailored to fit each organisation's specific requirements. To derive proper LDRs for a particular company, extensive mathematical analysis is carried out. In case of any change in the cost relationship, whole exercise is to be repeated.

Aggregate Planning Techniques

Heuristic Models These are based on historical aggregate planning data available with the organisation. Computer Search Models When organisation has large quantity of information on different production variable, computer search methods are used. A computer program simulating conditions under all possible combinations is used to identify most cost effective combination satisfying the production requirements.

Aggregate Planning For Service Organisations

Customer is a part of the production process and individual customer response and reaction cannot be estimated before hand Services can not be stored. In general, labour hours are used to aggregate all available factors in service organsiations.

Aggregate Planning For Service Organisations

Aspects of Aggregate Planning For services: Unutilized service capacity at a particular time is waste and can not be carried forward. Demand and capacity of a service organisation are difficult to estimate Labour flexibility is a useful factor in service activities as employee can handle many tasks.

Hallmark Strategy
Hallmark spends considerable resources to effectively
produce and distribute more than 40,000 different products through 43,000 retail outlets in the United States alone. Hallmark has never used layoffs to adjust production rates. Employee flexibility is the key to this strategy. Hallmark follows a philosophy of retraining its employees continually to make them more flexible. To keep workers busy, Hallmark shifts production from its Kansas City plant to branch plants in Topeka, Leavenworth, and Lawrence, Kansas, to keep those plants fully utilized. It uses the Kansas City plant as its swing facility. When demand is down, Kansas City employees may take jobs in clerical positions, all at factory pay rates. They might also be in classrooms learning new skills.

Example : Aggregate Planning

Shiva Garments, Bangalore has export unit
situated in Doddanakundi Industrial Area, Bangalore It is planning next years production. The estimated demands are as follows : Quarter I II III IV Demand 10000 13,000 10,000 12,000 Units The present production rate in single shift is 100 units. Company hires extra workers to run second shift whenever needed and the rate of production in such situation in second shift is 80 units. Each shift has 25 workers. Extra hired workers are kept for a quarter or multiple of the quarter. There is a provision of overtime to the order of 50 percent of the regular hours for the quarters when production is carried out in single shift basis.

 During OT, the rate of production is 25 percent more

Example : Aggregate Planning

than that in regular time. OT payment is 2 times the regular pay of Rs. 200. The cost of change over from single shift to double shift is Rs. 50,000 and from double shift to single shift is Rs 30,000. The inventory holding cost is Rs 25 per unit per month. Back order cost is Rs. 100 per unit per month. An order once delayed can only be accepted in next quarter or multiple of quarters. There is an initial inventory of 2000 units and it is a safety stock and required to be kept at all times. A quarter is of 3 months and every month has average 25 days. i) Compute the aggregate production plan at a continuous rate of 13,000 units per quarter. ii) Running single shift for the first half of the year and double shift for the second half of the year. (use OT to maximum wherever possible)

Example : Aggregate Planning

Solution : i) Aggregate plan I (constant rate of production 13000 per quarter) The regular- time production possible in single shift basis : Given a) rate of production 100 units b) No. of working days in a month 25 Hence , no. of units / quarter = 100 x 25 x 3 = 7500 Which is less than 10000 as required in I quarter. So overtime is required. Quantity produced in overtime = OT time / quarter x production ratio x rate of production/ day = 50 % of 75 working days x 125% productivity x 100 units per day = 0.5 x 75 x 1.25 x 100 = 4687.5 = 4686 Total units produced in single shift basis in a quarter = 7500 + 4686 = 121 86 Which is less than the required rate of production 13,000 units. Hence second shift is to be run.

Example : Aggregate Planning

Solution (contd..): The production in second shift = 80 units/ day x 75 days per quarter = 6000 units Since we are running second shift, no overtime is permitted. Thus the total production in double shift = 7500 + 6000 = 13,500 units / quarter the relevant cost of production for producing 13000 units per quarter are Regular wages = 25 workers / shift x 2 shifts x Rs 200 per worker per day x 75 days per quarter = Rs. 7,50,000

Example : Aggregate Planning

Solution : i) Aggregate plan I (constant rate of production 13000/q) Cost of change in shift = Rs. 50,000 Cost of inventory to be carried out is as computed below : Quarter I II III IV Production 13,000 13,000 13,000 13,000 Demand 10,000 13,000 10,000 12,000 Beginning 2,000 5,000 5,000 8,000 inventory End inventory 5,000 5,000 8,000 9,000 Average inventory 3,500 5,000 6,500 8,500

Example : Aggregate Planning

Solution (contd..: Cost of change in shift = Rs. 50,000 Cost of inventory to be carried out is as computed below : Quarter I II III IV Production 13,000 13,000 13,000 13,000 Demand 10,000 13000 10000 12000 Beginning 2,000 5,000 5,000 8,000 inventory End inventory 5,000 5,000 8,000 9,000 Average inventory 3,500 5,000 6,500 8,500 Cost of 3500 x 5000 x 6,500 x 8,500 x Carrying 25x 25 x 3 25 x3 25 x 3 inventory 3 months = 2,62,500 3,75,000 4,87,500 6,37,500

Example : Aggregate Planning

Solution (contd..): The total relevant cost = regular wages for 4 quarters+ O.T wages + cost for change in shifts + inventory cost + backlog cost = (200 x 50 workers x 25 days x 3 months x 4 quarters) + 0 + 50,000 + (2,62,500+ 3,75,000 + 4,87,500 + 6,37,500) + 0 = Rs. 30,00,000 +50,000+17,62,500 = Rs. 48,12,500

Example : Aggregate Planning

Solution (contd..): ii) Aggregate plan 2 : (single shift for quarters I and II and double shift for quarters III and IV). According to plan, the production quantities are as Quarter I II III IV follows Regular 7500 7500 13500 13500 time production OT 4686 4686 production
We place the demand figures next to production figures, we get inventory or backlog

Example : Aggregate Planning

Solution (contd..):
Quarter Regular time production OT production Demand Beginning inventory Inventory at the end Average inventory I 7500 4686 10000 2000 4186 3093 II 7500 4686 13,000 4186 3372 3779 III 13500 10,000 3372 6872 5122 IV 13500 12,000 6872 8372 7622

If beginning inventory is less than safety stock 2000, production requirements to be increased to take care of safety stock

Example : Aggregate Planning

Solution (contd..): Relevant cost for aggregate plan 2 are Regular time wages = 2 quarters single shifts + 2 quarters double shifts = 2 x ( 25 workers x Rs 200 per day x 25 days in a month x 3 month in a quarter) + 2( 50 x 200 x 25 x 3 ) = 7,50,000 + 15,00,000 = Rs. 22,50,000 Overtime wages : these are for the first 2 quarters Single shift wages for a quarter x (time) 50% OT allowed x 2 (ratio of OT wages to regular wages x 2 ( no. of quarters) = (25 x 200 x 25 x 3) x 0.5 x 2x 2 = Rs. 7,50,000.

Example : Aggregate Planning

Solution (contd..): Inventory carrying cost : Rs 25 per month x 3 months in a quarter x (average inventory 3093 +3779 +5122 +7622) = Rs. 14,70,150 Change over cost : single shift to double shift only once = Rs. 50,000 Total relevant cost = Rs. 22,50,000 + 7,50,000+ 14,70,150+ 50,000 = Rs 45,20,150 Thus the plan 2 is less costly . If these costs satisfactorily cover all the relevant decision making factors the we choose this plan. Note that change over cost is not significant. Working double shift through out the year causes more regular time wages.