National Institute of Technology Calicut Department of Mechanical Engineering

SALES AND OPERATIONS PLANNING

(AGGREGATE PLANNING)
▪ The sales and operations plan (SOP) links strategic
goals to production and coordinates the various
planning efforts in a business, including marketing
planning, financial planning, operations planning,
human resource planning, etc.
▪ Concerned with the overall operations of an
organisation over a specified time horizon
▪ Determines the efficient way of responding (allocating
resources) to market conditions
▪ Effectively allocate system capacity (plant, equipment,
and manpower) over designated period
▪ A good production plan should
➢ be consistent with organisational policy
➢ meet demand requirements
➢ be within capacity constraints
➢ minimizes costs
▪ A medium range tactical problem of establishing
aggregate production rates, work force sizes, inventory
levels and possibly shipping rates
▪ States the mission manufacturing must accomplish if
the firm’s overall objectives are to be met
▪ Managerial objective is to develop an integrated game
plan whose manufacturing portion is the production
plan

1
Introduction: Sales and operations planning Feb 2020
 National Institute of Technology Calicut Department of Mechanical Engineering
▪ The production plan, therefore, links strategic goals to
production and is coordinated with sales objectives,
resource availabilities, and financial budgets
▪ Game plan considers an integrated view of marketing,
finance and production

Planning Level Orientation

Policy, Product, Process,
& Plant Decisions
Long Range Strategic

Aggregate
Intermediate Range Planning Linking Activity

Short Range Operations Decisions Operational

• LONG RANGE
- products
- processes
- plant location
- plant layout
• INTERMEDIATE RANGE (Aggregates)
- output rates
- employment levels
- inventory
- subcontracting
• SHORT RANGE
- job assignments
2
Introduction: Sales and operations planning Feb 2020
 National Institute of Technology Calicut Department of Mechanical Engineering
- machine loading
- job sequencing
- lot sizes
▪ Provides the basis for making the more detailed set of
MPC decisions
▪ Conceptually, production planning should precede and
direct MPC decision-making
▪ In some firms, however, it is only after the other MPC
systems are in place that the resultant production
planning decisions are clearly defined
➢ Top-down approach Vs Bottom-up approach
Long Range

Strategic
Planning

Aggregate Planning

Master Production Scheduling

Material Requirements Planning (MRP)

Detailed Scheduling (Shop Floor Control)

Short
Range

Top-Down Planning

3
Introduction: Sales and operations planning Feb 2020
 National Institute of Technology Calicut Department of Mechanical Engineering
▪ The planning performed in other MPC system
modules is necessarily detailed, and the language is
quite different from that required for production
planning
▪ The production plan might be stated in rupees or
aggregate units of output per month while the MPS
could be in end product units per week
▪ MPS might be stated in units that use special bills of
materials to manage complicated options

product
Aggregate Plan G1 G2 G3 Gn groups

Master Production P1 P2 P3 P4 P5 products

Schedule

Material C1 C2 components
Requirements
Planning

C3 C4 C5 C6

Fig.: Planning Stages

▪ The production plan needs to be expressed in
meaningful units, but it also needs to be expressed in
manageable number of units
▪ Experience indicates that 5 to 15 family groups seems
to be about right for a top management group to
handle

4
Introduction: Sales and operations planning Feb 2020
 National Institute of Technology Calicut Department of Mechanical Engineering
▪ Production plan is not a forecast of demand
▪ It is the planned production, stated on an aggregate
basis, for which manufacturing management is to be
held responsible
▪ Organisations attempt to satisfy variations in demand
by manipulating the variables (size and combination)
in its control
▪ Pure and mixed strategies can be used to indicate the
variables in its control
Pure strategy
Output is changed by varying only one of the
variables under management’s control
Mixed Strategy
Output is changed by varying two or more of the
variables at a time
Potential responses to demand fluctuations
• Vary workforce size
• Carry product inventory
• Use overtime
• Extra shifts
• Vary load via product mix
• Subcontract
• Vary customer service (backlogs)
• Add contracyclical products
• Vary marketing (price, advertising)

5
Introduction: Sales and operations planning Feb 2020
 National Institute of Technology Calicut Department of Mechanical Engineering
Aggregate Planning Strategies
• SUPPLY
o Workforce
▪ hire / fire
▪ overtime / slack
▪ temporaries
▪ extra shifts
o Inventory
o Subcontracting
o Product Mix
• DEMAND
o Pricing
o Promotion
o Customer Service
o Backlog

Composite
Sales
Quantity

Furnace Sales

Air Conditioner
Sales

Ja Feb Mar Apr Ma Jun July Au Sep Oct No Dec

n Fig.: Demand y Effect:
e g v Products
Contracyclical
▪ There are four fundamentals in SOP: demand, supply,
volume, and mix
6
Introduction: Sales and operations planning Feb 2020
 National Institute of Technology Calicut Department of Mechanical Engineering
▪ First consider the balance between demand and supply
▪ If demand exceeds supply, think about the problems
▪ SOP should give a plan that balance supply and
demand and should provide early warning signals
when they are becoming unbalanced
▪ Two other fundamentals are volume and mix.
▪ Volume concerns big-picture decisions about how
much to make and the production rates of product
families, while mix concerns about detailed decisions
about which individual products to make, in what
sequence and for which orders.

Current Status
production rates
workforce size
inventory levels

Aggregate Aggregate Plan

Demand Forecasts production rates
Customer Orders
Planning workforce size
Model inventory levels

Capacity Constraints
equipment
personnel
materials
overtime
extra Shifts
subcontracting
Fig.: Aggregate Planning Function
7
Introduction: Sales and operations planning Feb 2020
 National Institute of Technology Calicut Department of Mechanical Engineering

Fig.: Key linkages in sales and operations planning

▪ Above Fig. shows that many linkages SOP are outside
the manufacturing planning and control systems.
Therefore, the SOP necessarily must be in terms that
are meaningful to the firm’s nonmanufacturing
executives.
▪ SOPs provide a framework for master production
schedule (MPS) which can be planned and controlled
by satisfying material resources and plant capacities in
a way that are consistent with strategic business
objectives (see the above Fig.)
The Aggregate Planning Problem
▪ The general form can be stated as follows:
Given a set of (usually monthly) forecasts of
demand for a single product, or some measure of
output that is common across several products,
aggregate planning specifies for each period in
8
Introduction: Sales and operations planning Feb 2020
 National Institute of Technology Calicut Department of Mechanical Engineering
terms of: i) Size of workforce, Wt ii) Rate of
production, Pt iii) Quantity shipped, St so that the
expected total cost over a given planning interval
can be minimised.
▪ The cost components included:
➢ Cost of regular payroll and overtime
Regular time cost is the cost of producing a unit of
output during regular working hours, including
direct and indirect labours, materials and
manufacturing expenses
Overtime cost is the cost associated with using
manpower beyond normal working hours
➢ Production rate change costs
The expenses incurred in altering the production
rate substantially from one period to the next
including such items as cost of layoffs, hiring,
training, learning and so on
➢ Inventory associated costs
The cost associated with carrying or not carrying
inventory
▪ The definition of aggregate planning problem
considered three variables: Wt, Pt and St. They are
measured in per period (month) t basis.
▪ The resulting inventory at the end of the period t, It is
It = It-1 + Pt - St
(The variable Wt does not appear because any set
level of Wt, in turn determine the possible range of
values that Pt can assume)
▪ The backlog of order at the end of the period t, Bt is
9
Introduction: Sales and operations planning Feb 2020
 National Institute of Technology Calicut Department of Mechanical Engineering
Bt = Bt-1 + Dt - Pt
Dt = actual (or forecasted) demand in period t
Production planning under constant average
demand in periods of planning horizon
▪ The solution to the problem is greatly simplified if
average demand over the planning interval is expected
to be constant
▪ Under such circumstances, there would be no need to
consider changing the level of production rate, nor size
of the workforce, nor the planned quantity to be
shipped from period to period
▪ The appropriate size of regular payroll is
Average demand rate per period
Wt =
Productivi ty per worker
▪ Use overtime to replenish safety stock on occasions
Example Problems:
1. Determine the backlog and inventory at the end of a
month t, given the following: production rate - 300
units (Pt), demand rate - 350 units (Dt), shipping rate -
320 units (St), inventory at the end of previous month
– 30 units (It-1) and back order at the end of previous
month – 20 units (Bt-1). Also, determine the size of
regular payroll workers, given the following (i)
average production rate of 300 units per month, (ii)
average output per worker of 2 units per day and (ii)
average number of working days of 22 per month.
Ans:
It = It-1 + Pt - St
10
Introduction: Sales and operations planning Feb 2020
 National Institute of Technology Calicut Department of Mechanical Engineering
Bt = Bt-1 + Dt - Pt
It = 30 + 300 – 320 = 10 units
Bt = 20 + 350 – 300 = 50 units
300
Wt = = 6.82  7
22  2
2. The projected aggregate demand of a group of
products for the next 12 months is given below. What
is the minimum level of constant workforce necessary
to meet demand and incur no stockouts? Assume an
initial inventory of 150. What is 12th period inventory
level under the constant workforce determined by
you?

Month 1 2 3 4 5 6 7 8 9 10 11 12
Demand 486 530 500 480 470 526 450 480 500 530 570 604

Regular time output rate = 10 units per month per

employee
Ans:
Annual production requirement after considering initial
inventory = 6126 – 150 = 5976
Monthly production requirement = 5976/12 = 498
Number of workers = 498/10 = 49.8
This can be approximated as 50 number of workers.
Initial inventory = 150 units
It = It-1 + Pt - Dt (Assume that shipping rate = demand
rate, Note that It = It-1 + Pt - St)
11
Introduction: Sales and operations planning Feb 2020
 National Institute of Technology Calicut Department of Mechanical Engineering
Month 1 2 3 4 5 6 7 8 9 10 11 12
Demand 486 530 500 480 470 526 450 480 500 530 570 604
Production 500 500 500 500 500 500 500 500 500 500 500 500
End Inv. 164 134 134 154 184 158 208 228 228 198 128 24
12th period ending inventory = 24 units
Production planning under varying average demand
in periods of planning horizon
▪ The complexity in the aggregate planning problem,
arises from the fact that in most situations demand per
period is not constant but varies from period to period
▪ Under such situations the following questions are
raised:
➢ Should inventory investment be used to absorb
the fluctuation in demand over the planning
period by accumulating inventories during slack
periods to meet demand in peak periods?
➢ Why not the fluctuations in demand be absorbed
by varying the size of the work force by hiring or
laying off workers?
➢ Why not keep the size of the workforce constant
and absorb fluctuations in demand by changing
the rate of production per period by working
shorter or longer hours as necessary, including
the payment of overtime?
➢ In process industries where capacity exceeds
average demand over a long period, should
periodic shutdowns be used or should the plant be
throttled?
12
Introduction: Sales and operations planning Feb 2020
 National Institute of Technology Calicut Department of Mechanical Engineering
➢ Why not keep the size of the workforce constant
and meet the fluctuations in demand through
planned backlogs or by subcontracting excess
demand?
➢ Is it always profitable to meet all fluctuations in
demand or should some orders not be accepted?
Structured Approach to Aggregate Planning
1) Set policies on controllable variables
2) Establish forecast interval and horizon
3) Develop demand forecasting system
4) Select unit of aggregate capacity
5) Determine relevant cost structures
6) Apply aggregate planning techniques

13
Introduction: Sales and operations planning Feb 2020