Aggregate Production

Planning
 Overview of Operational
Planning Activities
• Long-Range Planning
–Focuses on strategic issues relation to capacity,
process, selection, and plant location.
• Intermediate-Range Planning
–Focuses on tactical issues pertaining to
aggregate workforce and material requirements
for the coming year.
• Short-Range Planning
–Addresses day-to-day issues of scheduling
workers on jobs at assigned work stations.
 Aggregate Planning
• Aggregate Production Planning
–The process for determining the most cost
effective way to match supply and demand over
the next 12–18 months.
• Master Production Scheduling (MPS)
–Short-term scheduling of specific end product
requirements for the next several quarters.
• Rough-Cut or Resource Capacity Planning
–Determining that adequate production capacity
and warehousing are available to meet demand.
 Aggregate Planning
• Aggregate planning is essentially a “big picture” approach to
planning. Planners tend to avoid focusing on individual products
or services, instead they focus on a group of similar products or
services.
– A planner in a company producing television set would
not concern themselves with 25-inch or 27-inch sets.
Instead, planners would lump all models together and deal
with them as though they were a single product; hence
the term aggregate (combined) planning.
– For purpose of aggregate planning, it is often convenient
to think of capacity in terms of labor hours or machine
hours per period, or output rates ( barrels per period,
units period).
 Why do organizations need to do aggregate panning?

• The answer is twofold.

– 1) one part is related to planning: it takes time to
implement plans. For instance, if the plan calls for hiring
and training new workers, that will take time.
– 2) the second part is strategic: Aggregate is important
because is not possible to predict with any degree of
accuracy the timing and volume of demand for individual
items. So if an organization were to “lock in” on individual
items, it would lose the flexibility to respond to the market.
• Aggregate planning is important because it can help synchronize
flow throughout the supply chain; it affects costs, equipment
utilization, employment levels, and customer satisfaction.
 An overview of Aggregate Planning
• Aggregate planning begins with a forecast of aggregate demand
for the intermediate range. This is followed by a general plan to
meet demand requirements by setting output, employment, and
finished-goods inventory levels or service capacities.
– Demand and Capacity- Aggregate planners are concerned
with the quantity and the timing of expected demand. If total
expected demand for the planning period is much different
from available capacity over that same period, the major
approach of planners will be to try to achieve a balance by
altering capacity, demand, or both. The task of aggregate
planners is to achieve rough equality of demand and capacity
over the entire planning horizon.
– Inputs to Aggregate Planning- first, the available resource
over the planning period must be known. Then, the forecast of
expected demand must be available. Finally, planners must
take into account any policies regarding changes in
employment levels.
 Overview of
Aggregate
Planning
Activities (for
manufacturing)
 Demand and Capacity Option

• Aggregate planning strategies can be

described as proactive, reactive, or mixed.

• Proactive strategies involve demand options: They attempt to

alter demand so that it matches capacity.

• Reactive strategies involves capacity options: They attempt to

alter capacity so that it matches demand.

• Mixed strategies involve the elements of each of these

approaches
 Demand and Capacity Option cont.

• Demand options the basic demand options are the following:

– 1) Pricing. Pricing differentials are commonly used to shift
demand from peak period to off-peak periods.
• Example hotels’ offer lower rates for weekend stays
• Airlines offer lower fares for night travel
• Restaurants smaller portions and prices for children
– 2) Promotion. Advertising and other forms of promotion, such as
displays and direct marketing can sometimes be very effective in
shifting demand so that it conforms more closely to capacity
– 3) Backorders. Shifting demand to other periods by allowing
back orders. That is orders are taken in one period and
deliveries promised for a later period.
– 4) Creating new demand.
• For instance, demand for bus transportation tends to be more intense during
the morning and late afternoon rush hours but much lighter at other times.
Creating new demand for buses at other times (e.g., trips by schools, clubs)
 Demand and Capacity Option cont.

• Capacity options the basic capacity options are the following

– 1) Hire and lay off workers. The extent to which operations are labor
intensive determines the impact that changes in the workforce level will
have on capacity.
– 2) Overtime/slack time. The use of overtime can be especially attractive
in dealing with seasonal demand peaks by reducing the need to hire and
train people who will have to be laid off during the off-season.
– 3) Part-time workers. In certain instances, the use of part-time workers is
a viable option- much depends on the nature of the work, training and
skills needed.
– 4) Inventories. The use of finished-goods inventories allows firms to
produce goods in one period and sell or ship them in another period,
although this involves holding or carrying those goods as inventory until
they are needed.
– 5) Subcontracting. Subcontracting enables planners to acquire
temporary capacity, although it affords less control over the output and
may lead to higher costs and quality problems.
 Demand and Capacity Option cont.

– 6) Outsourcing. As an alternative to subcontracting, an organization

might consider outsourcing: contacting with another organization to
supply some portion of the goods or services on a regular basis.
– 7) Subcontracting in. In periods of excess capacity, an organization may
subcontract in, that is, conduct work for another organization.

• Important Note
• Options that are most suited to influencing demand (demand
options) fall in the domain of marketing than in operations.
• Capacity options fall in the domain of operations but include
the use of back orders.
 Production Planning Strategies
• Aggregate planners might adopt a number of
strategies. Some of the most important ones
are:
–A) Level capacity strategy maintaining a steady
rate of regular-time output while meeting variations
in demand by a combination of options . Under a
level capacity strategy, variations in demand are
met by using some combination of inventories,
overtime, part-time workers, subcontracting, and
back orders while maintaining a steady rate of
output.
 Production Planning Strategies

–B) Chase demand strategy matching capacity to

demand; the planned output for any period would be
equal to expected demand for that period.
–C) Mixed Strategy organization may opt for a
strategy that involves some combination of the pure
strategies (level capacity and chase demand
strategy)
 Production Planning Strategies (cont’d)
• Pure Strategy
–Either a chase strategy when product exactly
matches demand or a level strategy when
production remains constant over a specified
number of periods.
• Mixed Strategy
–A combination of chase and level strategies to
match supply and demand.
Pure Chase and Pure Level Strategies
 Comparison of reactive strategies

Chase approach
capacities (workforce levels, output rates, etc.) are adjusted to match
demand requirements over the planning horizon
Advantages:
Investment in inventory is low
Labor utilization is kept high
Disadvantages:
The cost of adjusting output rates and/or workforce levels
Level approach
capacities (workforce levels, output rates, etc.) are kept constant over
the planning horizon.
Advantages:
stable output rates and workforce levels
Disadvantages:
Greater inventory costs
Increased overtime and idle time
Resource utilization that vary over time
Required Inputs to the Production Planning System
 Aggregate Production Planning
• Production Rate
–The capacity of output per unit of time (such as
units per day or units per week.
• Workforce Level
–Number of workers required to provide a
specified level of production.
 Aggregate Production Planning
• Relevant Costs
–Basic production costs (fixed and variable)
–Costs associated with changes in the
production rate (e.g., labor costs)
–Inventory holding costs
–Backlog (stockout) costs
 Aggregate Planning Techniques (cont’d)
• Full Costs
–All of the actual, out-of-pocket costs associated
with a particular aggregate plan.
–Used for developing a labor and material
budget.
• Marginal (Incremental) Costs
–Unique costs attributable to a particular
aggregate plan that are above and beyond those
required to build the product by its most
economical means.
 Aggregate Planning Techniques
• Trial and Error
–Costing out the production alternatives and
choosing the one with the lowest cost.
• Linear Programming
• Linear Decision Rule
• Various Heuristic Methods
 Forecasted
Demand and
Workdays for
C&A Company
First Alternative: Pure Chase Strategy
 Second
Alternative: Pure
Level Strategy
Third Alternative:
Minimum
Workforce with
Subcontracting
(mix strategy)
 Constant
Workforce with
Overtime
Strategy (mix
strategy)
Summary of Costs for Aggregate Plans
 Aggregate planning for service

Tucson Parks and Recreation Department hires 116

full time regular direct workers and 120 full time
equivalent (FTE) part-time workers.
Cost information is listed on the following table
 Cost information
Full-time direct-labor employees
Average wage rate $4.45 per hour
Fringe benefits 17% of wage rate
Administrative costs 20% wage rate
Part-time employees
Average wage rate $4.03
Fringe benefits 11% of wage rate
Administrative costs 25% of wage rate
Subcontracting all full time $1.6 million
jobs
Subcontracting all part time $1.85 million
jobs
 Aggregate Planning Applied to Services:
Tucson Parks and Recreation Department
• Actual Demand Requirement for Full-Time Direct
Employees and Full-Time Equivalent (FTE) Part-Time
Employees
Three Possible Plans for the Parks and Recreation Department
Comparison of Costs for All Three Alternatives