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Aggregate Planning and S&OP

PowerPoint presentation to accompany

Heizer and Render

Operations Management, Eleventh Edition

Principles of Operations Management, Ninth Edition

PowerPoint slides by Jeff Heyl

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Outline

Global Company Profile:
Frito-Lay

The Planning Process
Sales and Operations Planning
The Nature of Aggregate Planning
Aggregate Planning Strategies

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Outline - Continued

Methods for Aggregate Planning

Aggregate Planning in Services

Revenue Management

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Learning Objectives

When you complete this chapter you should be able to:

Define sales and operations planning
Define aggregate planning
Identify optional strategies for developing an aggregate plan

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When you complete this chapter you should be able to:

Learning Objectives

Prepare a graphical aggregate plan
Solve an aggregate plan via the transportation method
Understand and solve a revenue management problem

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Aggregate Planning at
Frito-Lay

More than three dozen brands, 15 brands sell more than $100 million annually, 7 sell over $1 billion
Planning processes covers 3 to 18 months
Unique processes and specially designed equipment
High fixed costs require high volumes and high utilization

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Aggregate Planning at
Frito-Lay

Demand profile based on historical sales, forecasts, innovations, promotion, local demand data
Match total demand to capacity, expansion plans, and costs
Quarterly aggregate plan goes to 36 plants in 17 regions
Each plant develops 4-week plan for product lines and production runs

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The Planning Process

Figure 13.1

Long-range plans (over one year)

Capacity decisions critical to long range plans

Issues:

Research and Development

New product plans

Capital investments

Facility location/expansion

Intermediate-range plans (3 to 18 months)

Issues:

Sales and operations planning

Production planning and budgeting

Setting employment, inventory,

subcontracting levels

Analyzing operating plans

Short-range plans (up to 3 months)

Scheduling techniques

Issues:

Job assignments

Ordering

Job scheduling

Dispatching

Overtime

Part-time help

Top executives

Operations managers with sales and operations planning team

Operations managers, supervisors, foremen

Responsibility

Planning tasks and time horizons

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Sales and Operations Planning

Coordination of demand forecasts with functional areas and the supply chain
Typically done by cross-functional teams
Determine which plans are feasible
Limitations must be reflected
Provides warning when resources do not match expectations
Output is an aggregate plan

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S&OP
and the
Aggregate
Plan

Figure 13.2

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Sales and Operations Planning

Decisions must be tied to strategic planning and integrated with all areas of the firm over all planning horizons
S&OP is aimed at

The coordination and integration of the internal and external resources necessary for a successful aggregate plan

Communication of the plan to those charged with its execution

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Sales and Operations Planning

Requires
A logical overall unit for measuring sales and output
A forecast of demand for an intermediate planning period in these aggregate terms
A method for determining relevant costs
A model that combines forecasts and costs so that scheduling decisions can be made for the planning period

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Aggregate Planning

The objective of aggregate planning is usually to meet forecast demand while minimizing cost over the planning period

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Aggregate Planning

QUARTER 1
Jan.	Feb.	March
150,000	120,000	110,000
QUARTER 2
April	May	June
100,000	130,000	150,000
QUARTER 3
July	Aug.	Sept.
180,000	150,000	140,000

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Aggregate Planning

Combines appropriate resources into general terms
Part of a larger production planning system
Disaggregation breaks the plan down into greater detail
Disaggregation results in a master production schedule

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Aggregate Planning Strategies

Should inventories be used to absorb changes in demand?
Should changes be accommodated by varying the size of the workforce?
Should part-timers, overtime, or idle time be used to absorb changes?
Should subcontractors be used and maintain a stable workforce?
Should prices or other factors be changed to influence demand?

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Capacity Options

Changing inventory levels

Increase inventory in low demand periods to meet high demand in the future
Increases costs associated with storage, insurance, handling, obsolescence, and capital investment
Shortages may mean lost sales due to long lead times and poor customer service

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Capacity Options

Varying workforce size by hiring or layoffs

Match production rate to demand
Training and separation costs for hiring and laying off workers
New workers may have lower productivity
Laying off workers may lower morale and productivity

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Capacity Options

Varying production rates through overtime or idle time

Allows constant workforce
May be difficult to meet large increases in demand
Overtime can be costly and may drive down productivity
Absorbing idle time may be difficult

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Capacity Options

Subcontracting

Temporary measure during periods of peak demand
May be costly
Assuring quality and timely delivery may be difficult
Exposes your customers to a possible competitor

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Capacity Options

Using part-time workers

Useful for filling unskilled or low skilled positions, especially in services

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Demand Options

Influencing demand

Use advertising or promotion to increase demand in low periods
Attempt to shift
demand to slow
periods
May not be
sufficient to
balance demand
and capacity

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Demand Options

Back ordering during high-demand periods

Requires customers to wait for an order without loss of goodwill or the order
Most effective when there are few if any substitutes for the product or service
Often results in lost sales

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Demand Options

Counterseasonal product and service mixing

Develop a product mix of counterseasonal items
May lead to products or services outside the company’s areas of expertise

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Aggregate Planning Options

TABLE 13.1	Aggregate Planning Options
OPTION	ADVANTAGES	DISADVANTAGES	COMMENTS
Changing inventory levels	Changes in human resources are gradual or none; no abrupt production changes.	Inventory holding cost may increase. Shortages may result in lost sales.	Applies mainly to production, not service, operations.
Varying workforce size by hiring or layoffs	Avoids the costs of other alternatives.	Hiring, layoff, and training costs may be significant.	Used where size of labor pool is large.

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Aggregate Planning Options

TABLE 13.1	Aggregate Planning Options
OPTION	ADVANTAGES	DISADVANTAGES	COMMENTS
Varying production rates through overtime or idle time	Matches seasonal fluctuations without hiring/ training costs.	Overtime premiums; tired workers; may not meet demand.	Allows flexibility within the aggregate plan.
Sub-contracting	Permits flexibility and smoothing of the firm’s output.	Loss of quality control; reduced profits; loss of future business.	Applies mainly in production settings.

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Aggregate Planning Options

TABLE 13.1	Aggregate Planning Options
OPTION	ADVANTAGES	DISADVANTAGES	COMMENTS
Using part-time workers	Is less costly and more flexible than full-time workers.	High turnover/ training costs; quality suffers; scheduling difficult.	Good for unskilled jobs in areas with large temporary labor pools.
Influencing demand	Tries to use excess capacity. Discounts draw new customers.	Uncertainty in demand. Hard to match demand to supply exactly.	Creates marketing ideas. Overbooking used in some businesses.

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Aggregate Planning Options

TABLE 13.1	Aggregate Planning Options
OPTION	ADVANTAGES	DISADVANTAGES	COMMENTS
Back ordering during high-demand periods	May avoid overtime. Keeps capacity constant.	Customer must be willing to wait, but goodwill is lost.	Many companies back order.
Counter-seasonal product and service mixing	Fully utilizes resources; allows stable workforce.	May require skills or equipment outside the firm’s areas of expertise.	Risky finding products or services with opposite demand patterns.

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Mixing Options to Develop a Plan

A mixed strategy may be the best way to achieve minimum costs
There are many possible mixed strategies
Finding the optimal plan is not always possible

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Mixing Options to Develop a Plan

Chase strategy
Match output rates to demand forecast for each period
Vary workforce levels or vary production rate
Favored by many service organizations

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Mixing Options to Develop a Plan

Level strategy
Daily production is uniform
Use inventory or idle time as buffer
Stable production leads to better quality and productivity
Some combination of capacity options, a mixed strategy, might be the best solution

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Methods for Aggregate Planning

Graphical Methods
Popular techniques
Easy to understand and use
Trial-and-error approaches that do not guarantee an optimal solution
Require only limited computations

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Graphical Methods

Determine the demand for each period

Determine the capacity for regular time, overtime, and subcontracting each period

Find labor costs, hiring and layoff costs, and inventory holding costs

Consider company policy on workers and stock levels

Develop alternative plans and examine their total cost

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Roofing Supplier Example 1

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

6,200

124

= = 50 units per day

Total expected demand

Number of production days

Average requirement

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Roofing Supplier Example 1

Figure 13.3

70 –

60 –

50 –

40 –

30 –

0 –

Jan Feb Mar Apr May June = Month

     

22 18 21 21 22 20 = Number of

working days

Production rate per working day

Level production using average monthly forecast demand

Forecast demand

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Roofing Supplier Example 2

Plan 1 – constant workforce

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 (hiring and training)	$300 per unit
Cost of decreasing daily production rate (layoffs)	$600 per unit

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Roofing Supplier Example 2

Total units of inventory carried over from one

month to the next = 1,850 units

Workforce required to produce 50 units per day = 10 workers

MONTH	PRODUCTION DAYS	PRODUCTION AT 50 UNITS PER DAY	DEMAND FORECAST	MONTHLY INVENTORY CHANGE	ENDING INVENTORY
Jan	22	1,100	900	+200	200
Feb	18	900	700	+200	400
Mar	21	1,050	800	+250	650
Apr	21	1,050	1,200	–150	500
May	22	1,100	1,500	–400	100
June	20	1,000	1,100	–100	0
1,850

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Roofing Supplier Example 2

Total units of inventory carried over from one

month to the next = 1,850 units

Workforce required to produce 50 units per day = 10 workers

MONTH	PRODUCTION DAYS	PRODUCTION AT 50 UNITS PER DAY	DEMAND FORECAST	MONTHLY INVENTORY CHANGE	ENDING INVENTORY
Jan	22	1,100	900	+200	200
Feb	18	900	700	+200	400
Mar	21	1,050	800	+250	650
Apr	21	1,050	1,200	–150	500
May	22	1,100	1,500	–400	100
June	20	1,000	1,100	–100	0
1,850

COST	CALCULATIONS
Inventory carrying	$9,250	(= 1,850 units carried x $5 per unit)
Regular-time labor	99,200	(= 10 workers x $80 per day x 124 days)
Other costs (overtime, hiring, layoffs, subcontracting)	0
Total cost	$108,450

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Roofing Supplier Example 3

In-house production = 38 units per day
x 124 days

= 4,712 units

Subcontract units = 6,200 – 4,712

= 1,488 units

COST	CALCULATIONS
Regular-time labor	$75,392	(= 7.6 workers x $80 per day x 124 days)
Subcontracting	29,760	(= 1,488 units x $20 per unit)
Total cost	$105,152

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Roofing Supplier Example 3

70 –

60 –

50 –

40 –

30 –

0 –

Jan Feb Mar Apr May June = Month

     

22 18 21 21 22 20 = Number of

working days

Production rate per working day

Level production using lowest monthly forecast demand

Forecast demand

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Roofing Supplier Example 4

TABLE 13.4	Cost Computations for Plan 3
MONTH	FORECAST (UNITS)	DAILY PROD RATE	BASIC PRODUCTION COST (DEMAND X 1.6 HRS/UNIT X $10/HR)	EXTRA COST OF INCREASING PRODUCTION (HIRING COST)	EXTRA COST OF DECREASING PRODUCTION (LAYOFF COST)	TOTAL COST
Jan	900	41	$ 14,400	—	—	$ 14,400
Feb	700	39	11,200	—	$1,200 (= 2 x $600)	12,400
Mar	800	38	12,800	—	$600 (= 1 x $600)	13,400
Apr	1,200	57	19,200	$5,700 (= 19 x $300)	—	24,900
May	1,500	68	24,000	$3,300 (= 11 x $300)	—	24,300
June	1,100	55	17,600	—	$7,800 (= 13 x $600)	25,400
$99,200	$9,000	$9,600	$117,800

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Roofing Supplier Example 4

70 –

60 –

50 –

40 –

30 –

0 –

Jan Feb Mar Apr May June = Month

     

22 18 21 21 22 20 = Number of

working days

Production rate per working day

Forecast demand and monthly production

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Comparison of Three Plans

Plan 2 is the lowest cost option

TABLE 13.5	Comparison of the Three Plans
COST	PLAN 1	PLAN 2	PLAN 3
Inventory carrying	$ 9,250	$ 0	$ 0
Regular labor	99,200	75,392	99,200
Overtime labor	0	0	0
Hiring	0	0	9,000
Layoffs	0	0	9,600
Subcontracting	0	29,760	0
Total cost	$108,450	$105,152	$117,800

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Mathematical Approaches

Useful for generating strategies
Transportation Method of Linear Programming
Produces an optimal plan
Works well for inventories, overtime, subcontracting
Does not work when nonlinear or negative factors are introduced
Other Models
General form of linear programming
Simulation

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Transportation Method

TABLE 13.6	Farnsworth’s Production, Demand, Capacity, and Cost Data
SALES PERIOD
MAR.	APR.	MAY
Demand	800	1,000	750
Capacity:
Regular	700	700	700
Overtime	50	50	50
Subcontracting	150	150	130
Beginning inventory	100	tires

COSTS
Regular time	$40 per tire
Overtime	$50 per tire
Subcontracting	$70 per tire
Carrying cost	$ 2 per tire per month

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Transportation Example

Important points

Carrying costs are $2/tire/month. If goods are made in one period and held over to the next, holding costs are incurred.

Supply must equal demand, so a dummy column called “unused capacity” is added.

Because back ordering is not viable in this example, cells that might be used to satisfy earlier demand are not available.

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Transportation Example

Quantities in each column designate the levels of inventory needed to meet demand requirements

In general, production should be allocated to the lowest cost cell available without exceeding unused capacity in the row or demand in the column

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Transportation Example

Table 13.7

SUPPLY FROM	DEMAND FOR	TOTAL CAPACITY AVAILABLE (supply)
Period 1 (Mar)	Period 2 (Apr)	Period 3 (May)	Unused Capacity (dummy)
Beginning inventory	0	2	4	0	100
100
Period 1	Regular time	40	42	44	0	700
700
Overtime	50	52	54	0	50
50
Subcontract	70	72	74	0	150
150
Period 2	Regular time	40	42	0	700
X
Overtime	50	52	0	50
X
Subcontract	70	72	0	150
X
Period 3	Regular time	40	0	700
X	X
Overtime	50	0	50
X	X
Subcontract	70	0	130
X	X
TOTAL DEMAND	800	1,000	750	230	2,780

700
50
50	100

700

130

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Aggregate Planning in Services

Most services use combination strategies and mixed plans
Controlling the cost of labor is critical

Accurate scheduling of labor-hours to assure quick response to customer demand

An on-call labor resource to cover unexpected demand

Flexibility of individual worker skills

Flexibility in rate of output or hours of work

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Five Service Scenarios

Restaurants

Smoothing the production process

Determining the optimal workforce size

Hospitals
Responding to patient demand
National Chains of Small Service Firms
Planning done at national level and at local level

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Five Service Scenarios

Miscellaneous Services
Plan human resource requirements
Manage demand
Airline industry
Extremely complex planning problem
Involves number of flights, number of passengers, air and ground personnel, allocation of seats to fare classes
Resources spread through the entire system

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Revenue Management

Allocating resources to customers at prices that will maximize revenue

Service or product can be sold in advance of consumption

Demand fluctuates

Capacity is relatively fixed

Demand can be segmented

Variable costs are low and fixed costs are high

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Revenue Management Example

Figure 13.5

Demand Curve

Passed-up contribution

Money left on the table

Potential customers exist who are willing to pay more than the $15 variable cost of the room, but not $150

Some customers who paid $150 were actually willing to pay more for the room

Total

$ contribution

= (Price) x (50

rooms)

= ($150 - $15)

x (50)

= $6,750

Room sales

100

$150

Price charged for room

$15

Variable cost

of room

Price

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Total $ contribution =
(1st price) x 30 rooms + (2nd price) x 30 rooms =
($100 - $15) x 30 + ($200 - $15) x 30 =

$2,550 + $5,550 = $8,100

Revenue Management Example

Figure 13.6

Demand Curve

Price

Room sales

100

$100

Price 1

for room

$200

Price 2

for room

$15

Variable cost

of room

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Revenue Management Approaches

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

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Revenue Management Approaches

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

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Making Revenue Management Work

Multiple pricing structures must be feasible and appear logical to the customer

Forecasts of the use and duration of use

Changes in demand

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C H A P T E R 1 3 | AG G R E GAT E P L A N N I N G A N D S & O P 521

the intermediate plan into short-term plans consisting of weekly, daily, and hourly schedules. Short-term planning techniques are discussed in Chapter 15.

Intermediate planning is initiated by a process known as sales and operations planning (S&OP).

Sales and Operations Planning Good intermediate planning requires the coordination of demand forecasts with functional areas of a !rm and its supply chain. And because each functional part of a !rm and the supply chain has its own limitations and constraints, the coordination can be dif!cult. This coordi- nated planning effort has evolved into a process known as sales and operations planning (S&OP). As Figure 13.2 shows, S&OP receives input from a variety of sources both internal and external to the !rm. Because of the diverse inputs, S&OP is typically done by cross-functional teams that align the competing constraints.

One of the tasks of S&OP is to determine which plans are feasible in the coming months and which are not. Any limitations, both within the !rm and in the supply chain, must be re- "ected in an intermediate plan that brings day-to-day sales and operational realities together. When the resources appear to be substantialy at odds with market expectations, S&OP provides advanced warning to top management. If the plan cannot be implemented in the short run, the planning exercise is useless. And if the plan cannot be supported in the long run, strategic changes need to be made. To keep aggregate plans current and to support its intermediate plan- ning role, S&OP uses rolling forecasts that are frequently updated—often weekly or monthly.

The output of S&OP is called an aggregate plan. The aggregate plan is concerned with determin- ing the quantity and timing of production for the intermediate future, often from 3 to 18 months

Figure 13.2 Relationships of S&OP and the Aggregate Plan

Sales and operations planning (S&OP) A process of balancing resources and forecasted demand, aligning an organization’s competing de- mands from supply chain to final customer, while linking strategic planning with operations over all planning horizons.

Product decisions (Ch. 5)

1st Qtr

D e

m a

n d

2nd Qtr

3rd Qtr

4th Qtr

Demand forecasts, orders (Ch.4)

Process planning and

capacity decisions

(Ch. 7 and S7)

Marketplace

Master production

schedule and MRP systems

(Ch.14)

Detailed work

schedules (Ch.15)

Sales and operations planning develops the aggregate plan

for operations

Research and technology

Workforce (Ch.10)

Inventory on hand (Ch.12)

Supply-chain support (Ch.11)

External capacity (subcontractors)

Aggregate plan A plan that includes forecast levels for families of products of finished goods, inventory, shortages, and changes in the workforce.

LO1 Define sales and operations planning

M17_HEIZ1145_11_SE_C13.indd 521 12/11/12 4:49 PM