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Chapter 8

Aggregate Planning in a Supply Chain

True/False

1. The goal of aggregate planning is to satisfy demand in a way that minimizes
profit.
Answer: False
Difficulty: Easy

2. Aggregate planning is a process by which a company determines levels of
capacity, production, subcontracting, inventory, stockouts, and even pricing over
a specified time horizon.
Answer: True
Difficulty: Moderate

3. Aggregate planning solves problems involving aggregate decisions rather than
stock keeping unit (SKU) level decisions.
Answer: True
Difficulty: Easy

4. Traditionally, much of aggregate planning is focused within an enterprise and
may not always be seen as a part of supply chain management.
Answer: True
Difficulty: Moderate

5. Aggregate planning is an important supply chain issue because, to be effective, it
requires inputs from throughout the supply chain, but its results have little impact
on the supply chain.
Answer: False
Difficulty: Moderate

6. Short-term production serves as a broad blueprint for operations and establishes
the parameters within which aggregate planning decisions are made.
Answer: False
Difficulty: Easy

7. The aggregate planning problem is concerned with determining the production
level, inventory level, and capacity level (internal and outsourced) for each period
that maximizes the firm’s profit over the planning horizon.
Answer: True
Difficulty: Moderate

8. To create an aggregate plan, a company must specify the planning horizon for
the plan and the duration of each period within the planning horizon.
Answer: True
Difficulty: Easy

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and are referred to as mixed strategies. Answer: True Difficulty: Easy 18. Answer: False Difficulty: Moderate 14. A poor aggregate plan can result in improved sales and profits if the available inventory and capacity are unable to meet demand. Answer: False Difficulty: Moderate Page 2 of 15 . The mixed strategy is where a stable machine capacity and workforce are maintained with a constant output rate with inventory levels fluctuating over time. Most strategies that an aggregate planner actually uses are in combination. and backlog costs. The time flexible strategy is where the production rate is synchronized with the demand rate by varying machine capacity or hiring and laying off employees as the demand rate varies. A planning horizon is usually between three and five years. Answer: False Difficulty: Hard 15. The aggregate planner must make a trade-off between capacity. A poor aggregate plan may result in a large amount of excess inventory and capacity. thereby raising costs. inventory. A highly effective tool for a company to use when it tries to maximize profits while being subjected to a series of constraints is aggregate programming. Answer: False Difficulty: Moderate 10. Answer: True Difficulty: Moderate 16. An aggregate plan that increases one cost typically results in the increase of the other two. Answer: False Difficulty: Easy 11. Answer: True Difficulty: Moderate 12. Answer: True Difficulty: Moderate 13. Answer: False Difficulty: Hard 17.9. The time flexible strategy is where workforce (capacity) is kept stable but the number of hours worked is varied over time in an effort to synchronize production with demand.

Safety capacity is defined as capacity used to satisfy demand that is lower than forecasted. Answer: True Difficulty: Moderate 26. it becomes less important to perform aggregate planning. Answer: False Difficulty: Moderate 21. Companies should work with downstream partners to produce forecasts and with upstream partners to determine constraints when doing aggregate planning. Given that forecasts are always wrong to some degree. The aggregate plan should be viewed primarily as an in-house tool that does not need to be communicated to supply chain partners. forecast errors must be taken into account when formulating aggregate plans. managers do not need to make changes to the aggregate plan. As inputs into the aggregate plan change. Answer: False Difficulty: Easy 25. Answer: False Difficulty: Easy 28.19. Answer: True Difficulty: Easy 24. the aggregate plan needs to have some flexibility built into it if it is to be useful. As capacity utilization increases. Answer: True Difficulty: Easy 22. A manager should perform sensitivity analysis on the inputs into an aggregate plan to choose the best solution for the range of possibilities that could occur. Safety inventory is defined as inventory held to satisfy demand that is higher than forecasted. Answer: False Difficulty: Easy 23. Answer: True Difficulty: Moderate 27. Answer: False Difficulty: Moderate Page 3 of 15 . Answer: True Difficulty: Moderate 20. Forecasting errors are dealt with in aggregate plans using either safety backlog or safety capacity. To improve the quality of these aggregate plans.

detail planning. d. e. dissatisfy customers in a way that maximizes profit. d. c. sales planning. throughout the supply chain. Answer: d Difficulty: Moderate 5. inventory. e. aggregate decisions rather than stock keeping unit (SKU) level decisions. d. b and c only Answer: c Difficulty: Easy 4. throughout the company. requires inputs from a. aggregate decisions or stock keeping unit (SKU) level decisions. The goal of aggregate planning is to a. Aggregate planning. aggregate planning. b. within an enterprise. dissatisfy customers in a way that minimizes profit. Aggregate planning solves problems involving a. all suppliers. b. satisfy demand in a way that minimizes profit. production. all of the above Answer: c Difficulty: Moderate Page 4 of 15 . to be effective. Much of aggregate planning has traditionally been focused a. all customers. subcontracting.Multiple Choice 1. d. c. e. c. b. d. beyond enterprise boundaries. stockouts. satisfy demand in a way that maximizes profit. all departments. aggregate decisions and stock keeping unit (SKU) level decisions. c. e. c. all of the above Answer: a Difficulty: Moderate 2. and even pricing over a specified time horizon is a. none of the above Answer: c Difficulty: Easy 3. on short-term production scheduling. stock keeping unit (SKU) level decisions rather than aggregate decisions. b. inventory planning. The process by which a company determines levels of capacity. e. on customer relationship management. b.

The operational parameter concerned with the number of units completed per unit time (such as per week or per month) is a. c. c. workforce. The operational parameter concerned with demand not satisfied in the period in which it arises. The operational parameter concerned with the number of workers/units of capacity needed for production is a. d. overtime. backlog. production rate. backorders e. b. inventory on hand. e. e. but carried over to future periods is a. inventory on hand. workforce. workforce c. The operational parameter concerned with the amount of overtime production planned is a. c. workforce. overtime. b. production rate. d. inventory on hand Answer: d Difficulty: Moderate 7. overtime d. backlog. c. e.6. production rate. backlog. Answer: a Difficulty: Easy 8. d. overtime. Answer: c Difficulty: Easy 10. overtime. d. Answer: d Difficulty: Easy Page 5 of 15 . Answer: b Difficulty: Easy 9. inventory on hand. production rate. production rate b. b. Which of the following are not operational parameters the aggregate planner is concerned with? a. e. b. workforce. backlog. inventory on hand.

Aggregate planning is concerned with determining a. d. establishes the parameters within which short-term production and distribution decisions are made. e. workforce. d.11. backlog. overtime. the production level. b. subcontracting. d. Answer: a Difficulty: Easy 13. Answer: e Difficulty: Easy 12. backlog. inventory on hand. and capacity for each period. d. b. allows the supply chain to alter capacity allocations and change supply contracts. The aggregate plan a. and capacity for each period. sales level. b and c only Answer: d Difficulty: Moderate 15. c. the production level. inventory level. none of the above Answer: c Difficulty: Moderate Page 6 of 15 . c. c. The operational parameter concerned with the number of units of machine capacity needed for production is a. machine capacity level. subcontracting. b. all of the above e. staffing level. e. b. overtime. c. The operational parameter concerned with the planned inventory carried over the various periods in the planning horizon is a. e. The operational parameter concerned with the subcontracted capacity required over the planning horizon is a. b. backlog. the demand level. c. inventory level. production rate. serves as a broad blueprint for operations. the production level. inventory on hand. machine capacity level. Answer: c Difficulty: Easy 14. e. d. and capacity for each period. and capacity for each period. overtime. inventory on hand.

The planning horizon is a. a and b only Answer: d Difficulty: Moderate 17. cost of reducing machine capacity. the length of time required to produce the aggregate plan. cost of laying off workforce. The length of the planning horizon is usually between a.16. demand forecast for each period in the planning horizon b. To create an aggregate plan. c. d. cost of overtime e. The cost of changing capacity includes the a. three and five years. the planning horizon for the plan. cost of reducing machine capacity Page 7 of 15 . c. the duration of each period within the planning horizon. cost of adding machine capacity b. the time period over which the aggregate plan is to produce a solution. cost of adding machine capacity. c. e. b. e. one and three months. key information required. labor costs d. all of the above e. cost of hiring workforce c. d. b. the duration of each time period in the aggregate plan. Which of the following is not information needed by the aggregate planner? a. d. b. one and three years. none of the above Answer: a Difficulty: Easy 18. cost of hiring workforce. cost of laying off workforce d. b. production costs c. three and eighteen months. d. c. the solution to the aggregate plan. cost of changing the demand forecast Answer: e Difficulty: Moderate 20. Which of the following is not a cost of changing capacity? a. cost of subcontracting production e. none of the above Answer: b Difficulty: Moderate 19. a company must specify a. all of the above Answer: e Difficulty: Easy 21. e.

inventory. c. inventory. limits on layoffs e. c. d. efficient use of capacity. limits on stockouts and backlogs b. time flexible strategy Answer: a Difficulty: Easy 26. inventory. d. lost sales and lost profits. appropriate inventory levels. e. b. Answer: d Difficulty: Hard 24. inventory. capability. Answer: b Difficulty: Moderate Page 8 of 15 . capability. limits on overtime c. e. The strategy where the production rate is synchronized with the demand rate by varying machine capacity or hiring and laying off employees as the demand rate varies is the a. and sales costs. capacity. b. and backlog costs. adjustable strategy b. Which of the following is not a distinct aggregate planning strategy for achieving balance between capacity. d. c. time flexible strategy. e. Chase strategy c. capacity. better sales and lost profits. limits on sales commissions d. lost sales and better profits. The fundamental trade-offs available to an aggregate planner are between a. limits on capital available Answer: c Difficulty: Moderate 23. Answer: d Difficulty: Moderate 22. level strategy d. and backlog costs. adjustable strategy. inventory. mixed strategy e. and backlog costs? a. level strategy. A poor aggregate plan can result in a. mixed strategy. and sales costs. Which of the following is not a constraint the aggregate planner needs to consider? a. none of the above Answer: c Difficulty: Easy 25. b. Chase strategy.

adjustable strategy. distribution programming. forecast errors have no impact. Answer: d Difficulty: Moderate 31. time flexible strategy. mixed strategy. c. e. forecast accuracy is assumed. Chase strategy. The strategy where workforce (capacity) is kept stable but the number of hours worked is varied over time in an effort to synchronize production with demand is the a. e. d. c. production programming. forecast accuracy is not a factor. a. The strategy where a stable machine capacity and workforce are maintained with a constant output rate. none of the above Answer: b Difficulty: Moderate Page 9 of 15 . manufacturing programming. e. Most strategies that an aggregate planner actually uses are in combination and are referred to as the a. time flexible strategy. adjustable strategy. forecast errors must be taken into account. Chase strategy. level strategy. d. b. time flexible strategy. level strategy. When formulating aggregate plans. e. c. A highly effective tool for a company to use when it tries to maximize profits while being subjected to a series of constraints is a. linear programming. e. adjustable strategy. is the a. d. b. b. c. mixed strategy. d. b. Answer: c Difficulty: Hard 29. d. Answer: e Difficulty: Moderate 28. Answer: d Difficulty: Easy 30. b. c. aggregate programming. Chase strategy.27. level strategy. with inventory levels fluctuating over time. mixed strategy.

Capacity used to satisfy demand that is higher than forecasted is a. safety sales. c. carry extra workforce permanently c. Aggregate planning should consider information from a. safety workforce. all of the above e. d. e. b. subcontracting e. purchase capacity or product from an open or spot market Answer: a Difficulty: Easy 36. b. e. Which of the following is not an approach a company can use to create a buffer for forecast error using safety capacity? a. safety sales. c. Inventory held to satisfy demand that is higher than forecasted is a. build and carry extra inventories d. d. b and c only Answer: e Difficulty: Moderate 33. purchase capacity or product from an open or spot market Answer: c Difficulty: Easy 37. safety backlog. carry extra workforce permanently c. d. Which of the following is an approach a company can use to create a buffer for forecast error using safety inventory? a. b. Answer: b Difficulty: Easy 35. safety capacity. safety backlog. build and carry extra inventories d. safety backlog. safety capacity. downstream partners to produce forecasts. overtime b. safety inventory. safety workforce. b. only the enterprise as its breadth of scope.32. Forecasting errors are dealt with using a. c. Page 10 of 15 . safety inventory. safety capacity. overtime b. Answer: c Difficulty: Easy 34. subcontracting e. safety inventory.

be a final product because changes are disruptive to the supply chain. it lessens the importance of aggregate planning. as inputs to the aggregate plan change e. none of the above Answer: c Difficulty: Moderate 41. all supply chain partners who will be affected by it. only upstream partners. b. monthly c. it becomes less important to perform aggregate planning. How frequently should the aggregate plan be rerun? a. The quality of the aggregate plan can be improved by using information from a. it becomes more important to perform aggregate planning. c. it does not affect the importance of performing aggregate planning. weekly b. none of the above Answer: c Difficulty: Moderate 40. d. only the local firm. none of the above Answer: b Difficulty: Moderate Page 11 of 15 . never Answer: d Difficulty: Hard 42. only downstream partners. e. all of the above e. b. e. b and c only Answer: d Difficulty: Easy 38. e. a. only the local firm. As capacity utilization increases. all parts of the supply chain. The aggregate plan needs to a. every 3 to 8 months d. c. c. have some flexibility built into it because forecasts are always wrong. e. c. d. The aggregate plan should be communicated to a. d. c. b. d. upstream partners to determine constraints. have some flexibility built into it because forecasts are usually right. be considered fixed because forecasts are usually accurate. only downstream partners. b. d. none of the above Answer: b Difficulty: Moderate 39. only upstream partners.

• Backlog: demand not satisfied in the period in which it arises but carried over to future periods. • Workforce: the number of workers/units of capacity needed for production. • Machine capacity level: the number of units of machine capacity needed for production. stockouts. Discuss the primary objective and operational parameters of aggregate planning. Answer: The goal of aggregate planning is to satisfy demand in a way that maximizes profit. inventory. • Subcontracting: the subcontracted capacity required over the planning horizon. • Overtime: the amount of overtime production planned. The aggregate planner’s main objective is to identify the following operational parameters over the specified time horizon: • Production rate: the number of units completed per unit time (such as per week or per month). Difficulty: Moderate 2. cost of hiring/laying off workforce ($/worker) and cost of adding or reducing machine capacity ($/machine) • Labor/machine hours required per unit • Inventory holding cost ($/unit/period) • Stockout or backlog cost ($/unit/period) • Constraints: • Limits on overtime • Limits on layoffs • Limits on capital available • Limits on stockouts and backlogs • Constraints from suppliers to the enterprise This information is used to create an aggregate plan that in turn helps a company make the following determinations: Page 12 of 15 . Aggregate planning is a process by which a company determines levels of capacity. regular time ($/hour). subcontracting. and overtime costs ($/hour) • Cost of subcontracting production ($/unit or $/hour) • Cost of changing capacity. and even pricing over a specified time horizon. Answer: An aggregate planner requires the following information: • Demand forecast F t for each Period t in the planning horizon that extends over T periods • Production costs • Labor costs.Essay/Problems 1. Discuss the information required for aggregate planning. The aggregate plan allows the supply chain to alter capacity allocations and change supply contracts. production. • Inventory on hand: the planned inventory carried over the various periods in the planning horizon. The aggregate plan serves as a broad blueprint for operations and establishes the parameters within which short-term production and distribution decisions are made. specifically.

workforce size. overtime. the workforce (capacity) is kept stable but the number of hours worked is varied over time in an effort to synchronize production with demand. Most strategies that a planner actually uses are a combination of these three and are referred to as mixed strategies. Although this strategy does require that the workforce be flexible. Answer: There are essentially three distinct aggregate planning strategies for achieving balance between these costs. These strategies involve trade-offs between capital investments. inventory. if machines are not used twenty four hours a day. Difficulty: Hard 3. • Backlog/stockout quantity: used to determine what the customer service levels will be. The three strategies are as follows: 1. • Machine capacity increase/decrease: used to determine if new production equipment needs to be purchased or idled. • Workforce hired/laid off: used to determine any labor issues that will be encountered.. It should be used when inventory carrying costs are relatively high and machine capacity is relatively inexpensive. A poor aggregate plan may also result in a large amount of excess inventory and capacity. This strategy can be expensive to implement if the cost of varying machine or labor capacity over time is high. The quality of an aggregate plan has a significant impact on the profitability of a firm. • Inventory held: used to determine how much warehouse space and working capital is needed. Therefore. It should be used when the cost of carrying inventory is very expensive and costs to change levels of machine and labor capacity are low. It can also have a significant negative impact on the morale of the workforce. A planner can use variable amounts of overtime or a flexible schedule to achieve this synchronization. and subcontracted time: used to determine number of workers and supplier purchase levels. 2. thereby raising costs. it avoids some of the problems associated with the Chase strategy. In practice. most notably changing the size of the workforce. In this case. work hours. seven days a week). and backlogs/lost sales. Page 13 of 15 .e. achieving this synchronization can be very problematic because of the difficulty in varying capacity and workforce on short notice. Explain the basic strategies that an aggregate planner has available to balance the various costs and meet demand. aggregate planning is a very important tool in helping a supply chain maximize profitability. This strategy results in low levels of inventory but with lower average utilization. Time flexibility strategy—using utilization as the lever: This strategy may be used if there is excess machine capacity (i. A poor aggregate plan can result in lost sales and lost profits if the available inventory and capacity are unable to meet demand. Chase strategy—using capacity as the lever: With this strategy. the production rate is synchronized with the demand rate by varying machine capacity or hiring and laying off employees as the demand rate varies. • Production quantity from regular time. The Chase strategy results in low levels of inventory in the supply chain and high levels of change in capacity and workforce.

Use aggregate planning as capacity utilization increases. Also make sure to communicate the aggregate plan to all supply chain partners who will be affected by it. Rerun the aggregate plan as new data emerges. the aggregate plan needs to have some flexibility built into it if it is to be useful. If a company has no trouble efficiently meeting demand this way. when utilization becomes high and capacity is an issue. Here production is not synchronized with demand. 2. relying on orders to set the production schedule can lead to capacity problems. aggregate plans should be reevaluated. the plan can appropriately adjust to handle the new situation. with upstream partners to determine constraints. It should be used when inventory carrying and backlog costs are relatively low. These orders are driven either by actual demand or through inventory management algorithms. Shortages and surpluses result in inventory levels fluctuating over time. or other changes occur. For instance. Employees benefit from stable working conditions. Work with partners downstream to produce forecasts. Think beyond the enterprise to the entire supply chain. there are many factors outside the enterprise throughout the supply chain that can dramatically impact the optimal aggregate plan. 4. managers should use the latest values of these inputs and rerun the aggregate plan. Given that these forecasts are always wrong to some degree. Either inventories are built up in anticipation of future demand or backlogs are carried over from high. a stable machine capacity and workforce are maintained with a constant output rate. Level strategy—using inventory as the lever: With this strategy. By using the latest inputs. and with any other supply chain entities that can improve the quality of the inputs into the aggregate plan. Aggregate plans are based on forecasts of future demand. Surprisingly. This strategy keeps capacity and costs of changing capacity relatively low. 3. Most aggregate planning done today takes only the enterprise as its breadth of scope. However. avoid the trap of only thinking about your enterprise when aggregate planning. Discuss key issues to be considered when implementing aggregate planning. This does not mean that a firm should only run aggregate plans once every three to eighteen months. A drawback associated with this strategy is that large inventories may accumulate and customer orders may be delayed. A manager should perform sensitivity analysis on the inputs into an aggregate plan. As inputs into the aggregate plan change. Make plans flexible because forecasts are always wrong. the plan will avoid suboptimization based on old data and will produce a better solution. Aggregate plans provide a map for the next three to eighteen months. such as increases in costs. when future demand changes. Page 14 of 15 . as new demand forecasts become available. Difficulty: Moderate 4. 3. Therefore. using the supply chain to increase the quality of the inputs will greatly improve the quality of the aggregate plan. many companies do not create aggregate plans and instead rely solely on orders from their distributors or warehouses to determine their production schedules. However. Using sensitivity analysis on the inputs into the aggregate plan will enable the planner to choose the best solution for the range of possibilities that could occur. As the plan is only as good as the quality of the inputs. then one could claim the lack of aggregate planning may not significantly harm the company.to low- demand periods. By building flexibility into the plan. Answer: 1.

When utilization is high. the likelihood of producing for all the orders as they arrive is very low. Planning needs to be done to best utilize the capacity to meet the forecasted demand. as capacity utilization increases. Difficulty: Moderate Page 15 of 15 . it becomes more important to perform aggregate planning. Therefore.