Aggregate Planning

Dealing with the Problem Complexity

through Decomposition
Corporate Strategy
Aggregate Unit
Demand

Aggregate Planning
(Plan. Hor.: 1 year, Time Unit: 1 month)

Capacity and Aggregate Production Plans

End Item (SKU)
Demand

Master Production Scheduling

(Plan. Hor.: a few months, Time Unit: 1 week)

SKU-level Production Plans

Manufacturing
and Procurement
lead times
Part process
plans

Materials Requirement Planning

(Plan. Hor.: a few months, Time Unit: 1 week)

Component Production lots and due dates

Shop floor-level Production Control

(Plan. Hor.: a day or a shift, Time Unit: real-time)

Aggregate Planning Problem

Aggr. Unit
Production Reqs

Corporate Strategy

Aggregate
Unit Demand

Aggregate
Unit Availability
(Current Inventory
Position)

Aggregate
Production Plan

Aggregate Planning

Aggregate Production Plan:

Aggregate Production levels
Aggregate Inventory levels
Aggregate Backorder levels

Required
Production Capacity

Production Capacity Plan:

Workforce level(s)
Overtime level(s)
Subcontracted Quantities

Product Aggregation Schemes

Items (or Stock Keeping Units - SKUs): The final products delivered to the
(downstream) customers
Families: Group of items that share a common manufacturing setup cost;
i.e., they have similar production requirements.
Aggregate Unit: A fictitious item representing an entire product family.
Aggregate Unit Production Requirements: The amount of (labor) time
required for the production of one aggregate unit. This is computed by
appropriately averaging the (labor) time requirements over the entire set of
items represented by the aggregate unit.
Aggregate Unit Demand: The cumulative demand for the entire set of items
represented by the aggregate unit.
Remark: Being the cumulate of a number of independent demand series, the
demand for the aggregate unit is a more robust estimate than its constituent
components.

Computing the Aggregate Unit

Production Requirements
Washing machine
Model Number
A5532

Required labor time

(hrs)
4.2

Item demand as % of
aggregate demand
32

K4242

4.9

21

L9898

5.1

17

3800

5.2

14

M2624

5.4

10

M3880

5.8

06

Aggregate unit labor time = (.32)(4.2)+(.21)(4.9)+(.17)(5.1)+(.14)(5.2)+

(.10)(5.4)+(.06)(5.8) = 4.856 hrs

Pure Aggregate Planning Strategies

1. Demand Chasing: Vary the Workforce Level
PC WC HC FC
D(t)

P(t) = D(t)
W(t)

D(t): Aggregate demand series

P(t): Aggregate production levels
W(t): Required Workforce levels
Costs Involved:
PC: Production Costs
fixed (setup, overhead)
variable (materials, consumables, etc.)
WC: Regular labor costs
HC: Hiring costs: e.g., advertising, interviewing, training
FC: Firing costs: e.g., compensation, social cost

Pure Aggregate Planning Strategies

2. Varying Production Capacity with Constant Workforce:
PC SC WC OC UC
D(t)

P(t)
S(t)
O(t)
U(t)
W = constant

S(t): Subcontracted quantities

O(t): Overtime levels
U(t): Undertime levels
Costs involved:
PC, WC: as before
SC: subcontracting costs: e.g., purchasing, transport, quality, etc.
OC: overtime costs: incremental cost of producing one unit in overtime
(UC: undertime costs: this is hidden in WC)

Pure Aggregate Planning Strategies

3. Accumulating (Seasonal) Inventories:
PC WC IC
D(t)

P(t)
I(t)
W(t), O(t), U(t), S(t) = constant

I(t): Accumulated Inventory levels

Costs involved:
PC, WC: as before
IC: inventory holding costs: e.g., interest lost, storage space, pilferage,
obsolescence, etc.

Pure Aggregate Planning Strategies

4. Backlogging:
PC WC BC
D(t)

P(t)
B(t)
W(t), O(t), U(t), S(t) = constant

B(t): Accumulated Backlog levels

Costs involved:
PC, WC: as before
BC: backlog (handling) costs: e.g., expediting costs, penalties, lost sales
(eventually), customer dissatisfaction

Typical Aggregate Planning Strategy

A mixture of the previously discussed pure options:
PC WC HC FC OC UC SC IC BC
P
W
H
F
O
U
S
I
B

D
Io
Wo

+
Additional constraints arising from the company strategy; e.g.,
maximal allowed subcontracting
maximal allowed workforce variation in two consecutive periods
maximal allowed overtime
safety stocks
etc.

Solution Approaches
Graphical Approaches: Spreadsheet-based simulation
Analytical Approaches: Mathematical (mainly linear
programming) Programming formulations

Analytical Approach:
A Linear Programming Formulation
min TC = t ( PCt*Pt+WCt*Wt+OCt*Ot+HCt*Ht+FCt*Ft+
s.t.
Prod. Capacity:

SCt*St+ICt*It+BCt*Bt )
t,(u_l_r)*Pt s_d)w_d)t*Wt+Ot

Material Balance: t, Pt+It-1+St = (Dt-Bt)+Bt-1+It

Workforce Balance: t, Wt = Wt-1+Ht-Ft
( Any additional policy constraints )
Var. sign restrictions: t, Pt, Wt, Ot, Ht, Ft, St, It, Bt 0
Time unit: month / unit_labor_req. /shift_duration (in hours) /
(working_days) for month t

Demand (vs. Capacity) Options or

Proactive Approaches to
Aggregate Planning
Influencing demand variation so that it aligns to available production
capacity:
advertising
promotional plans
pricing
(e.g., airline and hotel weekend discounts, telecommunication companies weekend
rates)

Counter-seasonal product (and service) mixing: Develop a product

mix with antithetic (seasonal) trends that level the cumulative required
production capacity.
(e.g., lawn mowers and snow blowers)

=> The outcome of this type of planning is communicated to the

overall aggregate planning procedure as (expected) changes in the
demand forecast.