AGGREGATE PRODUCTION PLANNING (APP)

Learning objectives
• What APP/AP is and how it is useful
• Variables related to AP
• Strategies
• Quantitative techniques
• Preparing APs and their costs

What APP/AP is and how it is useful

Aggregate Planning: medium range capacity planning (for 2-12 months). Short-range
plan for around one day to 2 months (covered under Sequencing in IIE). Long-range
plan 1 year and above.
AP relates the long-term plan and thus become strategic plan that define framework
within which operating decisions are made.

Where it is most useful: in fluctuation demand or capacity environment.

Goal: obtain a production plan to effectively utilize the organization’s resources to
satisfy expected demand. One part is time management and other is aggregation of
products. AP affects cost, equipment utilization, employment levels, and customer
satisfaction.
Decision areas: output rates, employment levels and changes, inventory levels and
changes, backorders and subcontracting.

Aggregate Planning
• Approximate or preliminary scheduling of overall operations
• For all offerings from an organization (grouped or bunched together)
• Planning horizon, 1-2 years broken down into monthly or quarterly periods
• To minimize the short-sighted effects of day-to-day scheduling
• Considers total number of workers, hours of m/c time, tons of war mats, units of
output
• Minimize long-run costs (of hiring & laying off workers, storing finished goods,
wages & OT charges, shortage & backordering costs, and subcontracting cots) of
meeting forecasted demand

Do you change capacity either of the ways?

• Overtime (OT)
• Additional or fewer shifts
• Hiring or laying off workers
• Subcontracting
• Building up inventories during slack periods
• Leasing facilities or workers or both
• Backlogging demand
• Changing demand through market promotions or price changes
• Undersupplying the market
 Long-term capacity Demand Forecast
planning
Aggregate production
planning
Necessary
modification
Master production
schedule (MPS)

Resource requirements If feasible

planning

Necessary
modification Detailed planning and
scheduling systems
(e.g MRP)

Implementation

Figure: schematic diagram of a sequential production planning process

Concept of Aggregation
Focus on a group of products (product family) or an entire production line instead of
one. Put all models together and deal with them as a ‘single’ product. Focus on overall
demand, manpower, etc. Ease problem of obtaining various resources.
Production plan: AP of a manufacturing plant that mainly focuses on production rates
and inventory holdings.
Staffing plan: service firm’s AP, centers on staffing.
AP has relationship with business plan (statement of income, costs and profits) and
MPS. The major functional areas of AP are Engineering, human resources, materials,
operations, distribution & marketing, and accounting & finance. AP leads to master
production schedule (MPS/MS).

Disaggregating Aggregate Plan

Breaking down aggregate plans into specific product requirements in order to
determine the labor, materials, and inventory requirements. It is called MPS.
 Corporate Economic, Aggregate
strategies competitive demand
and policies & political forecast
condition

Production & capacity

Business plan
strategies

Production plan Production capacity

Schedule for individual

Master production schedule (MPS)
product

Examples: All bicycles made by a company, all sizes of TVs, all brands of cars, and so
on.

Think capacity in terms of labour hours or machine hours per period, or output rates

Purpose and Scope of AP

• Balancing demand and supply. Quantities and time. Supply is seen in terms of
capacity to fulfill demand of the respective time.
• Objectives: minimize cost/maximize profit, maximize customer services,
minimize change in production rates and workforce levels, minimize inventory
level, and maximize utilization of plant & equipment.
• Inputs to AP. (1) Clear sources of information; (2) forecast of expected
demand; and (3) policies regarding change in employment levels.

Input Outputs
Resources Total cost of a plan
• Workforce/production rate Projected levels
• Facilities and equipment • Inventory
Demand forecast • Output
Policy statements on workforce changes • Employment
Subcontracting • Subcontracting
Overtime • Backordering
Inventory levels/changes
Back orders
Costs
• Inventory carrying cost
• Backorder costs
• Hiring/firing
• Overtime
• Inventory changes
• Subcontracting
 • Demand and capacity option

Demand options Capacity options

• Pricing – special pricing
(early bird option),
opportunity cost, price
elasticity; less control
• Promotion – advertising,
less control on demand
• Backorders – possibility,
cost
• New demand – new orders
during peak demand
• Hire and fire – lower limit or skeleton crew,
resource needed, uneven demand, lay offs
• Overtime/slack time - easier than earlier one,
slack time for problem solving and worker
training
• Part-time worker or independent contractors
• Inventories – pertinent consideration
• Subcontracting – temporary capacity
attainment.

How to meet uneven demand

Think about demand-capacity balance. If demand falls short of capacity, then…? AP
strategies are:
• Maintain and level workforce
• Maintain a steady output rate
• Match demand period by period
• Use any combination of decision variables

Aggregate planning strategies (pure)

• Level production capacity strategy: Maintain a steady state of regular output
produce the same amount each period) while meeting variations in demand by a
combination of options (inventories, OT, part-time workers, subcontracting and
backorders). Use FG inventories or backlog demand information. Stable
employment, avoid overtime or extra workers.

• Chase demand strategy: produce demanded amount each period. Matching

capacity to demand; planned output for a period is set at the expected demand for
that period. OT or hiring & laying off are allowed. No FG inventory costs or
shortage costs. SS may be allowed.

Two important factors should be considered in choosing a strategy – company policy

(on inventories, OT, part-time workers, subcontracting and backorders) and costs.

Techniques for AP
Numerous. Simulation model, trial-and-error method, mathematical approach.

Simulation model
Computerized trail and error approach that can be examined under a variety
conditions.

AP procedural steps are:

1. Determine demand for each period
2. Determine capacities (regular time, OT, subcontracting) for each period
 3. Locate company policies (on safety stock, stable workforce, etc.)
4. Determine unit costs for regular time, OT, subcontracting, holding inventories,
backorders, layoffs, and so on.
5. Develop alternative plans and compute the cost for each
6. Select the best one to fulfill objectives

Informal Techniques
Use tables and graphs.

Period 1 2 3 4 5 … Total
Forecast
Output
• Regular time
• OT
• Subcontract
Output –forecast
Inventory
• Beginning
• Ending
• Average
Backorder
Costs
Output
• Regular time
• OT
• Subcontract
Hire/layoffs
Inventory
Backorders
Total
 Aggregate
Cumulative Cumulative production line
output/produ
ction

Cumulative demand lines

Period

Assumptions
• Regular output capacity is same in all periods.
• Cost of backordering, inventory, subcontracting, etc. is a linear function
composed on unit cost and no. of units
• All costs associated with a decision option can be represented by a lump sum
or by unit costs with quantity involved.
• Cost figures are constant and can be estimated
• Sufficient inventory capacity exists to make the plan useful
• Inventories are built up and drawn down at a uniform rate. Output occurs at a
uniform rate. Backlog may exist in the entire period.

Relationships can be used to determine the number of workers, amount of inventory

and cost of a particular plan.

Number of Number of Number of Number of

workers in a workers at new workers laidoff workers
period = end of + at start of the - at start of the
=
previous pd. = period =
period

Inventory at Inventory at Production Amount used to

the end of a the end of in current satisfy demand
= + -
period =
previous =
period =
in current
period period
The average inventory for a period = (sum of beginning and ending inventory)/2
 Cost for a Output cost Hire/layoff Inventory cost
period (regular + cost Plus
= + +
=
OT + = =
Backorder cost
subcontract)

Regular output cost = regular cost per unit x quantity of regular output

OT output cost = OT cost per unit x quantity of OT output

Subcontract output cost = Subcontract cost per unit x Subcontract quantity

Hire cost = Cost per hire x number hired

Layoff cost = Cost per layoff x number laid off

Inventory carrying cost = carrying cost per unit x average inventory

Backorder cost = backorder cost per unit x number of backorder units

Ex. Planners for a company that makes several models of a product are about to
prepare the aggregate plan that will cover six periods. The following information was
managed
Period 1 2 3 4 5 6 Total
Forecast 200 200 300 400 500 200 1,800

Regular output cost = RM2 / unit product; OT output cost = RM3 / unit product
Subcontract output cost = RM6 / unit product; Inventory cost = RM1 / unit product/
period on average inventory; Backorder cost = RM5 per unit per period. The initial
inventory is assumed to be zero in the first period. Planned ending inventory is alos
zero. There are 15 workers.
The company is willing to allow some backlog. Evaluate the plan that calls for steady
rate of regular-time output, using inventory to absorb the uneven demand.

Solution: Level output = 1800/6 = 300 per period with regular time
Period 1 2 3 4 5 6 Total
Forecast 200 200 300 400 500 200 1,800
Output
• Regular time 300 300 300 300 300 300 1,800
• OT -
• Subcontract -
Output –forecast 100
Inventory
• Beginning 0
• Ending 100
• Average 50
Backorder 0
Costs
Output
• Regular time RM600
• OT -
• Subcontract -
Hire/layoffs -
Inventory RM50
Backorders RM0
Total RM650

Now, if the planners need to decide developing an alternative plan, on the ground that
one person is about to retire. They do not like to hire another person but willing to
allow OT to make up the lost output. The reduced regular time is 280 units per period.
The max amount of OT output per period is 40 units. Develop a new plan and
compare it with the previous one.

Period 1 2 3 4 5 6 Total
Forecast 200 200 300 400 500 200 1,800
Output
• Regular time 280 300 300 300 300 300 1,800
• OT 0
• Subcontract -
Output –forecast 80
Inventory
• Beginning 0
• Ending 80
• Average 40
Backorder 0
Costs
Output
• Regular time RM560
 • OT 0
• Subcontract -
Hire/layoffs -
Inventory RM40
Backorders RM0
Total RM600

Now, if the management wants to deploy temporary workers to fill in during months of
high demand. Lets it costs an additional RM100 to hire and train a temporary worker
and that he can produce 15 units per period (20 units by a regular worker).

Period 1 2 3 4 5 6 Total
Forecast 200 200 300 400 500 200 1,800
Output
• Regular time 280 300 300 300 300 300 1,800
• OT -
• Subcontract -
Output –forecast 80
Inventory
• Beginning 0
• Ending 80
• Average 40
• Backorder 0
Costs
Output
• Regular time RM560
• OT -
• Subcontract -
Hire/layoffs 0
Inventory RM40
Backorders RM0
Total RM600

Mathematical Techniques
A number of techniques are available. Heuristic and computer search models.
One is Linear Transportation Programming
Assume: demand forecast is available for each period along with a workforce level
plan for regular period.

Say r = regular production cost/unit; t = OT cost/unit; s =subcontracting cost/unit; h =

holding cost/unit/period; b =backorder cost/unit/period; n = number of periods in
planning horizon
 Period Period 2 Period 3 Ending Unused Total
1 …. inventory in capacity capacity
period n
Period Beginning 0 L0
inventory h 2h nh 0

1 Regular r R1
time r+h r+2h r+nh

OT t O1

Subcontract s S1

2 Regular
time

OT

Subcontract
3 Regular
time

OT

Subcontract

Dema Total
nd
 Ex. For the following information, set up the problem in a transportation table (tableau)
and solve for minimum-cost plan.
Period 1 Period 2 Period 3
Demand 550 700 750
Capacity
• Regular 500 500 500
• OT 50 50 50
• Subcontracting 120 120 100
Beginning inventory 100; regular time cost RM60/unit OT RM80/unit, subcontract
RM90/unit. Inventory carrying cost RM1/unit month, and backorder cost RM3/unit month.

Supply Period Period Period Ending Unused Total

from 1 2 3 inventory in capacity Capacity
period n (supply)
Period Beginning 0 1 2 0 100
inventory 100
1 Regular 60 61 62 0 500
time
450 50
OT 80 81 82 0 50

50
Subcontrac 90 91 92 0 120
t
30 90
2 Regular 63 60 61 0 500
time
500
OT 83 80 81 0 50

50
Subcontrac 93 90 91 120
t
20 100
3 Regular 66 63 60 500
time
500
OT 86 83 80 50

50
Subcontrac 96 93 90 100
t
100
Deman 550 700 750 - 90 Total =
d 2090
 Supply from Period 1 Period 2 Period 3 Unused Total
capacity Capacity
(supply)
Period Beginning 0 1 2 0 100
inventory 100
1 Regular time 60 61 62 0 500

450 50
OT 80 81 82 0 50

50
Subcontract 90 91 92 0 120

30 90
2 Regular time 63 60 61 0 500

500
OT 83 80 81 0 50

50
Subcontract 93 90 91 120

20 100
3 Regular time 66 63 60 500

500
OT 86 83 80 50

50
Subcontract 96 93 90 100

100
Deman 500 700 750 90 Total = 2090
d

Now, calculate the total cost under the given allocations.

Can we improve it?

Linear programming for aggregate planning

You can find the optimal solution. But a large number of variables are included.
Dt = demanded quantity of a product in period (month) t (known).
Wt = workers available at the start of period t
Ht = workers hired at the start of period t
It = inventory at the end of period t
St = subcontracted production in period t
Ot = OT production in period t
R = production rate/pd/worker
r = % of OT to regular time production

For a period, constraints are:

No. of workers Wt = Wt −1 + H t − Lt
Inventory level I t = I t −1 + RWt + Ot + St − Dt
OT production unit O  r ( RW )
t t
There are 6 variables (Dt is not a variable), but three constraints for each period (say one month).
There will be 72 variables and 36 constraints in one year.

Objective function is to minimize the total cost

12
Tc =  (cwWt + ch H t + cl Lt + ci I t + cs St + co Ot )
t =1

cw = regular time wages/worker/period

ch = cost of hire of one worker
cl = cost to layoff one worker
ci = cost to hold one unit/period
cs = cost to subcontract one unit/period
co = cost to produce one unit during OT