12-1 Aggregate Planning

Operations Management

William J. Stevenson

8th edition
 12-2 Aggregate Planning

CHAPTER
12

Aggregate Planning

Operations Management, Eighth Edition, by William J. Stevenson

McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
12-3 Aggregate Planning

Planning Horizon

Aggregate planning: Intermediate-range

capacity planning, usually covering 2 to 12
months.
Long range

Intermediate
range
Short
range

Now 2 months 1 Year

12-4 Aggregate Planning

Overview of Planning Levels

• Short-range plans (Detailed plans)

• Machine loading
• Job assignments

• Intermediate plans (General levels)

• Employment
• Output

• Long-range plans
• Long term capacity
• Location / layout
12-5 Aggregate Planning

Planning Sequence
Figure 12.1

Economic,
Corporate competitive, Aggregate
strategies and political demand
and policies conditions forecasts

Establishes operations
Business Plan
and capacity strategies

Establishes
Aggregate plan
operations capacity

Master schedule Establishes schedules

for specific products
12-6 Aggregate Planning

Aggregate Planning Inputs

• Resources • Costs
• Workforce • Inventory carrying
• Facilities • Back orders

• Demand forecast • Hiring/firing

• Policies • Overtime

• Inventory changes
• Subcontracting
• Overtime • subcontracting

• Inventory levels

• Back orders
12-7 Aggregate Planning

Aggregate Planning Outputs

• Total cost of a plan

• Projected levels of inventory
• Inventory
• Output

• Employment

• Subcontracting

• Backordering
12-8 Aggregate Planning

Aggregate Planning Strategies

• Proactive
• Alter demand to match capacity
• Reactive
• Alter capacity to match demand
• Mixed
• Some of each
12-9 Aggregate Planning

Demand Options

• Pricing

• Promotion

• Back orders

• New demand
12-10 Aggregate Planning

Capacity Options

• Hire and layoff workers

• Overtime/slack time

• Part-time workers

• Inventories

• Subcontracting
12-11 Aggregate Planning

Aggregate Planning Strategies

• Maintain a level workforce

• Maintain a steady output rate
• Match demand period by period
• Use a combination of decision
variables
12-12 Aggregate Planning

Basic Strategies

• Level capacity strategy:

• Maintaining a steady rate of regular-time
output while meeting variations in demand
by a combination of options.
• Chase demand strategy:
• Matching capacity to demand; the planned
output for a period is set at the expected
demand for that period.
12-13 Aggregate Planning

Chase Approach

• Advantages
• Investment in inventory is low
• Labor utilization in high
• Disadvantages
• The cost of adjusting output rates and/or
workforce levels
12-14 Aggregate Planning

Level Approach

• Advantages
• Stable output rates and workforce
• Disadvantages
• Greater inventory costs
• Increased overtime and idle time
• Resource utilizations vary over time
12-15 Aggregate Planning

Techniques for Aggregate Planning

1. Determine demand for each period

2. Determine capacities for each period
3. Identify policies that are pertinent
4. Determine units costs
5. Develop alternative plans and costs
6. Select the best plan that satisfies objectives.
Otherwise return to step 5.
12-16 Aggregate Planning

Cumulative Graph
Figure 12.3
Cumulative output/demand

Cumulative
production
Cumulative
demand

1 2 3 4 5 6 7 8 9 10
12-17 Aggregate Planning

Average Inventory

Average Beginning Inventory + Ending Inventory

=
inventory 2
12-18 Aggregate Planning

Mathematical Techniques

Linear programming: Methods for obtaining

optimal solutions to problems involving
allocation of scarce resources in terms of
cost minimization.
Linear decision rule: Optimizing technique
that seeks to minimize combined costs,
using a set of cost-approximating functions
to obtain a single quadratic equation.
12-19 Aggregate Planning

Summary of Planning Techniques

Table 12.7

Technique Solution Characteristics

Graphical/charting Trial and Intuitively appealing, easy to
error understand; solution not
necessarily optimal.
Linear Optimizing Computerized; linear
programming assumptions not always valid.
Linear Optimizing Complex, requires considerable
decision rule effort to obtain pertinent cost
information and to construct
model; cost assumptions not
always valid.
Simulation Trial and Computerized models can be
error examined under a variety of
conditions.
12-20 Aggregate Planning

Aggregate Planning in Services

• Services occur when they are rendered

• Demand for service can be difficult to predict
• Capacity availability can be difficult to
predict
• Labor flexibility can be an advantage in
services
12-21 Aggregate Planning

Aggregate Plan to Master Schedule

Figure 12.4

Aggregate
Planning

Disaggregation

Master
Schedule
12-22 Aggregate Planning

Disaggregating the Aggregate Plan

• Master schedule: The result of disaggregating

an aggregate plan; shows quantity and timing
of specific end items for a scheduled horizon.
• Rough-cut capacity planning: Approximate
balancing of capacity and demand to test the
feasibility of a master schedule.
12-23 Aggregate Planning

Master Scheduling

• Master schedule
• Determines quantities needed to meet demand
• Interfaces with
• Marketing
• Capacity planning
• Production planning
• Distribution planning
12-24 Aggregate Planning

Master Scheduler

• Evaluates impact of new orders

• Provides delivery dates for orders

• Deals with problems

• Production delays
• Revising master schedule

• Insufficient capacity
12-25 Aggregate Planning

Master Scheduling Process

Figure 12.6

Inputs Outputs
Beginning inventory Projected inventory
Master
Forecast Master production schedule
Scheduling

Customer orders Uncommitted inventory

12-26 Aggregate Planning

Projected On-hand Inventory

Projected on-hand Inventory from Current week’s

inventory
=
previous week
- requirements
12-27 Aggregate Planning

Projected On-hand Inventory

Figure 12.8
Beginning
Inventory
JUNE JULY
64 1 2 3 4 5 6 7 8
Forecast 30 30 30 30 40 40 40 40
Customer Orders
(committed) 33 20 10 4 2
Projected on-hand
inventory 31 1 -29 Forecast is larger than
Customer orders in week 3

Customer orders are Forecast is larger than

larger than forecast in Customer orders in week 2
week 1
12-28 Aggregate Planning

Time Fences in MPS

Figure 12.12

Period
1 2 3 4 5 6 7 8 9

“frozen” “slushy” “liquid”

(firm or somewhat (open)
fixed) firm
12-29 Aggregate Planning

Solved Problems: Problem 1

12-30 Aggregate Planning

Flexibility Models

LP4
Caterpillar
12-31 Aggregate Planning

Production Process/Steps

PT2
Federal Signal