Resource Planning Framework for Goods and Services
A generic framework for resource planning is shown in Exhibit 13.1. This framework is broken down into three basic levels. Level 1 represents aggregate planning. Aggregate planning is the development of a long-term output and resource plan in aggregate units of measure. Aggregate plans define output levels over a planning horizon of one to two years, usually in monthly or quarterly time buckets. They normally focus on product families or total capacity requirements rather than individual products or specific capacity allocations. Aggregate plans also help to define budget allocations and associated resource requirements.
Aggregate planning is driven by demand forecasts. High-level forecasts are often developed for aggregate groups of items (see the Nestlé box). For instance, a consumer-products company like Procter & Gamble might produce laundry soap in a variety of sizes. However, it might forecast the total demand for the soap in dollars over some future time horizon, regardless of product size. Aggregate planning would then translate these forecasts into monthly or quarterly production plans.
Nestlé: Aggregate Planning for Candy Manufacturing
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Aggregate plans at a company that was acquired by Nestlé are focused on quality, personnel, capital, and customer service objectives. One of its major brand items that has a highly seasonal demand is boxed chocolates. Boxed chocolates are produced in three types, with a total of nine distinct end items: Black Magic, in 2 lb., 1, 1½ lb., and ½ boxes; Rendezvous, in a 14 oz. box; and Dairy Box, in the same four sizes as Black Magic. Forecasting is accomplished by dividing the year into 13 periods of four weeks each. Sales planning provides an item forecast, by period, for the full 13 periods. This estimate is updated every four weeks, reflecting the latest information on available inventories and estimated sales for the next 13 periods.
Aggregate planning is performed by first converting all items to a poundage figure. The planning task is to calculate levels of production that will best meet the quality, personnel, capital, and customer service restrictions. It is a stated company policy and practice to maintain a stable workforce. Short-term capacity can be increased with overtime and/or with part-time employees. The amount of inventory investment has become a major concern, and inventory levels must be kept low to meet restrictions on capital investment.
In Exhibit 13.1, Level 2 planning is called disaggregation. Disaggregation is the process of translating aggregate plans into short-term operational plans that provide the basis for weekly and daily schedules and detailed resource requirements. To disaggregate means to break up or separate into more detailed pieces. Disaggregation specifies more-detailed plans for the creation of individual goods and services or the allocation of capacity to specific time periods. For goods-producing firms, disaggregation takes Level 1 aggregate planning decisions and breaks them down into such details as order sizes and schedules for individual subassemblies and resources by week and day.
To illustrate aggregate planning and disaggregation, consider a producer of ice cream who might use long-term forecasts to determine the total number of gallons of ice cream to produce each quarter over the next two years. This projection provides the basis for determining how many employees and other resources such as delivery trucks would be needed throughout the year to support this plan. Disaggregation of the plan would involve developing targets for the number of gallons of each flavor to produce (which would sum to the aggregate planned number for each quarter); purchasing requirements for cream, chocolate, and other ingredients; work schedules and overtime plans; and so on.
As another example, an airline might use long-term passenger forecasts to develop monthly aggregate plans based on the number of passenger miles each month. This aggregate plan would also specify the resource requirements in terms of total airline capacity, flight crews, and so on. Disaggregation would then create detailed, point-to-point flight schedules, crew work assignments, food purchase plans, aircraft maintenance schedules, and other resource requirements.
Level 3 focuses on executing the detailed plans made at Level 2, creating detailed resource schedules and job sequences. Execution refers to moving work from one workstation to another, assigning people to tasks, setting priorities for jobs, scheduling equipment, and controlling processes. Level 3 planning and execution in manufacturing is sometimes called shop floor control and is addressed further in the next chapter.
13-1aResource Planning in Service Organizations
Resource management for most service-providing organizations generally does not require as many intermediate levels of planning as it does for manufacturing. This is illustrated in Exhibit 13.2. Service firms frequently take their aggregate plans and disaggregate them down to the execution level as detailed frontline staff and resource schedules, job sequences, and service-encounter execution. Physician capacity, calendars and schedules, for example, at the Mayo Clinic use a two-level resource planning process similar to Exhibit 13.2. There are several reasons for this:
Most manufactured goods are discrete and are “built up” from many levels of raw materials, component parts, and subassemblies. However, many services, such as credit card authorizations, a telephone call, a movie, or arriving at a bank teller window, are instantaneous or continuous and are not discrete. Hence, there is no need for multiple levels of planning for some services.
Services do not have the advantage of physical inventory to buffer demand and supply uncertainty, so they must have sufficient service capacity on duty at the right time in the right place to provide good service to customers, making short-term demand forecasting and resource scheduling absolutely critical.
Some services, however, use the three levels of planning similar to manufacturing firms. For example, many service facilities, such as fast-food restaurants, need to be close to the customer, requiring them to be scattered within a geographical area. In these cases, the firm creates aggregate plans at the corporate level and then disaggregates them by region or district (geographically). This is similar to Level 2 intermediate planning in manufacturing. Regional and district offices further disaggregate these plans and budgets given the intermediate-level budgets and resource constraints. Level 3 resource planning and execution occurs at the store level, where local forecasts, food and other supply orders, staff work shifts and schedules, and service encounters are created.
13-1bEnterprise Resource Planning
Enterprise resource planning (ERP) is an important information systems tool for managing resources across the value chain. ERP systems integrate all aspects of a business—accounting, customer relationship management, supply chain management, manufacturing, sales, human resources—into a unified information system, and they provide more timely analysis and reporting of sales, customer, inventory, manufacturing, human resource, and accounting data. Traditionally, each department of a company, such as finance, human resources, and manufacturing, has individual information systems optimized to the needs of that department. If the sales department wants to know the status of a customer’s order, for example, someone would typically have to call manufacturing or shipping. ERP combines each department’s information into a single, integrated system with a common database so that departments can easily share information and communicate with each other.
ERP systems usually consist of different modules that can be implemented individually so that each department still has a level of autonomy, but they are combined into an integrated operating system. For example, when a customer’s order is entered by sales, all information necessary to fulfill the order is built into the ERP system. The finance module would have the customer’s order history and credit rating; the warehouse module would have current inventory levels; and the supply chain module would have distribution and shipping information. Not only would sales be able to provide accurate information about product availability and shipping dates, but orders would also get processed faster, with fewer errors and delays.
Most subsystems of ERP systems, such as customer ordering, inventory management, and production scheduling, are real-time, transaction-processing systems, as opposed to batched processing systems, in which a day’s entire batch of transactions was typically processed during the night. In real-time processing, information is updated continuously, allowing the impacts to be reflected immediately in all other areas of the ERP system. Some business processes, however—such as the weekly payroll, monthly accounting reports, and billing—do not need real-time processing.
Two prominent vendors of ERP software are SAP (www.sap.com) and Oracle (www.oracle.com).
13-2Aggregate Planning Options
Managers have a va riety of options in developing aggregate plans in the face of fluctuating demand: workforce changes, inventory smoothing, and adjustments to facilities, equipment, and transportation. These are summarized in Exhibit 13.3. The choice of strategy depends on corporate policies, practical limitations, and cost factors.
Demand Management
Marketing strategies can be used to influence demand and to help create more feasible aggregate plans. For example, pricing and promotions can increase or decrease demand or shift it to other time periods. In services, recall that demand is time dependent, and there is no option to store the service. A hotel manager, for example, may advertise a low weekend rate to the local market in an attempt to increase short-term revenue and contribution to profit and overhead. Thus, demand management strategies are crucial for good aggregate planning and capacity utilization.
Production-Rate Changes
One means of increasing the output rate without changing existing resources is through planned overtime. Alternatively, hours can be reduced during slow periods through planned undertime. However, reduced overtime pay or sitting idle can seriously affect employee morale. Subcontracting during periods of peak demand may also alter the output rate. This would probably not be a feasible alternative for some companies, but it is effective in industries that manufacture a large portion of their own parts, such as the machine-tool industry. When business is brisk, components can be subcontracted; when business is slow, the firm may act as a subcontractor to other industries that may be working at their capacity limit. In that way, a stable workforce is maintained.
Workforce Changes
Changing the size of the workforce is usually accomplished through hiring and layoffs. Both have disadvantages. Hiring additional labor usually results in higher costs for the personnel department and for training. Layoffs result in severance pay and additional unemployment insurance costs, as well as low employee morale.
In many industries, changing workforce levels is not a feasible alternative. In firms that consist primarily of jobs with low skill requirements, however, it may be cost effective. The toy industry is a good example. Accurate forecasts for the winter holiday season cannot be made until wholesale buyers have placed orders, usually around midyear. Toy companies maintain a minimal number of employees until production is increased for the holidays. Then they hire a large number of part-time workers in order to operate at maximum capacity.
Inventory Changes
In planning for fluctuating demand, inventory is often built up during slack periods and held for peak periods. However, this increases carrying costs and may necessitate more warehouse space. A related strategy is to carry back orders or to tolerate lost sales during peak demand periods. But this may be unacceptable if profit margins are low and competition is high.
Facilities, Equipment, and Transportation
Facilities, equipment, and transportation generally represent long-term capital investments. Short-term changes in facilities and equipment are seldom used in traditional aggregate planning methods because of the capital costs involved. However, in some cases, it might be possible to rent additional equipment such as industrial forklifts, small machines, trucks, or warehouse space to accommodate periods of high demand.
13-3Strategies for Aggregate Planning
To illustrate some of the major issues involved with aggregate planning, consider the situation faced by Golden Beverages, a producer of two major products—Old Fashioned and Foamy Delite root beers. The spreadsheet in Exhibit 13.4 shows a monthly aggregate demand forecast for the next year. Notice that demand is in barrels per month—an aggregate unit of measure for both products. Golden Beverages operates as a continuous flow factory and must plan future production for a demand forecast that fluctuates quite a bit over the year, with seasonal peaks in the summer and winter holiday season.
How Can We Use Aggregate Planning for a Tennis Club?
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Services face many of the same issues in planning and managing resources as do manufacturing firms. Consider a 145-acre oceanfront resort located in Myrtle Beach, South Carolina, that is owned and operated by a major corporation. The tennis club and four courts are located next to the Sport & Health Club. All courts are lighted for night play, and there is no more room to build additional tennis courts. The demand for tennis lessons is highly seasonal, with peak demand in June, July, and August. In the summer months, when resort rooms are 98 to 100 percent occupied, requests for lesson time far exceed capacity, and owner and hotel guest complaints increase dramatically. The manager of the health club might consider a chase resource strategy with a base full-time tennis staff of two people and the use of part-time staff for much of the year. Or she might consider a level strategy with four full-time staff and no part-time staff.
How should Golden Beverages plan its overall production for the next 12 months in the face of such fluctuating demand? Suppose that the company has a normal production capacity of 2,200 barrels per month and a current inventory of 1,000 barrels. If it produces at normal capacity each month, we have the aggregate plan shown in Exhibit 13.4. To calculate the ending inventory for each month, we use Equation 13.1.
For example, January is 1,000 + 2,200 – 1,500 = 1,700 and February is 1,700 + 2,200 – 1,000 = 2,900.
A level production strategy plans for the same production rate in each time period. The aggregate plan for Golden Beverages shown in Exhibit 13.4 is an example of a level production strategy with a constant production rate of 2,200 barrels per month. A level strategy avoids changes in the production rate, working within normal capacity restrictions. Labor and equipment schedules are stable and repetitive, making it easier to execute the plan. However, ending inventory builds up to a peak of 3,200 barrels in March, and lost sales are 500 barrels in August due to inventory shortages.
An alternative to a level production strategy is to match production to demand every month. A chase demand strategy sets the production rate equal to the demand in each time period. Although inventories will be reduced and lost sales will be eliminated, many production-rate changes will dramatically change resource levels (the number of employees, machines, etc.). A chase demand strategy for Golden Beverages is shown in Exhibit 13.5 with a total cost of $1,835,050. As compared with the level production strategy documented in Exhibit 13.4, the cost of the chase demand strategy is $1,920,440 -1,835,050 = 85,390 less. Notice that no inventory carrying or lost sales costs are incurred, but substantial overtime, undertime, and rate-change costs are required.
Given the large number of aggregate planning decision variables with an infinite number of possible levels and combinations, countless alternative aggregate plans could be developed. Good solutions using spreadsheets can often be found by trial-and-error approaches. The Excel Aggregate Planning template allows you to experiment with production levels using trial-and-error methods to identify good options.
Managers have a variety of options in developing aggregate plans when demand fluctuates.