National Institute of Technology Calicut Department of Mechanical Engineering

PRODUCTION PLANNING (AGGREGATE PLANNING)

§ Concerned with the overall operations of an organisation over a specified time horizon
§ Determines the efficient way of responding (allocating resources) to market conditions
§ Effectively allocate system capacity (plant, equipment, and manpower) over designated
period
§ A good production plan should
Ø be consistent with organisational policy
Ø meet demand requirements
Ø be within capacity constraints
Ø minimizes costs
§ A medium range tactical problem of establishing aggregate production rates, work force
sizes, inventory levels and possibly shipping rates
§ States the mission manufacturing must accomplish if the firm’s overall objectives are to
be met
§ Managerial objective is to develop an integrated game plan whose manufacturing portion
is the production plan
§ The production plan, therefore, links strategic goals to production and is coordinated with
sales objectives, resource availabilities, and financial budgets
§ Game plan considers an integrated view of marketing, finance and production

Planning Level Orientation

Policy, Product, Process,
& Plant Decisions
Long Range Strategic

Aggregate
Intermediate Range Planning Linking Activity

Short Range Operations Decisions Operational

Fig. 1 Relationship between aggregate planning and other planning stages
• LONG RANGE
- products
- processes

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 National Institute of Technology Calicut Department of Mechanical Engineering

- plant location
- plant layout
• INTERMEDIATE RANGE (Aggregates)
- output rates
- employment levels
- inventory
- subcontracting
• SHORT RANGE
- job assignments
- machine loading
- job sequencing
- lot sizes

Marketing “The Game Financial

Planning Plan” Planning

MPC
boundary

Resource Production Demand

planning Planning Management

Master
Production
Scheduling

Fig. 2. Key Linkages of Production Planning

§ Provides the basis for making the more detailed set of MPC decisions
§ Conceptually, production planning should precede and direct MPC decision-making
§ In some firms, however, it is only after the other MPC systems are in place that the
resultant production planning decisions are clearly defined
Ø Top-down approach Vs Bottom-up approach

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 National Institute of Technology Calicut Department of Mechanical Engineering

Long Range

Strategic
Planning

Aggregate Planning

Master Production Scheduling

Material Requirements Planning (MRP)

Detailed Scheduling (Shop Floor Control)

Short
Range
Fig. 3 Top-Down Planning

§ The planning performed in other MPC system modules is necessarily detailed, and the
language is quite different from that required for production planning
§ The production plan might be stated in rupees or aggregate units of output per month
while the MPS could be in end product units per week
§ MPS might be stated in units that use special bills of materials to manage complicated
options
product
Aggregate Plan G1 G2 G3 Gn groups

Master Production P1 P2 P3 P4 P5 products

Schedule

Material C1 C2 components
Requirements
Planning

C3 C4 C5 C6

Fig. 4 Planning Stages

§ The production plan needs to be expressed in meaningful units, but it also needs to be
expressed in manageable number of units

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 National Institute of Technology Calicut Department of Mechanical Engineering

§ Experience indicates that 5 to 15 family groups seems to be about right for a top
management group to handle
§ Production plan is not a forecast of demand
§ It is the planned production, stated on an aggregate basis, for which manufacturing
management is to be held responsible
§ Organisations attempt to satisfy variations in demand by manipulating the variables (size
and combination) in its control
§ Pure and mixed strategies can be used to indicate the variables in its control
Pure strategy

Output is changed by varying only one of the variables under management’s control

Mixed Strategy

Output is changed by varying two or more of the variables at a time

Potential responses to demand fluctuations

• Vary workforce size
• Carry product inventory
• Use overtime
• Extra shifts
• Vary load via product mix
• Subcontract
• Vary customer service (backlogs)
• Add contracyclical products
• Vary marketing (price, advertising)

Aggregate Planning Strategies

• SUPPLY
o Workforce
§ hire / fire
§ overtime / slack
§ temporaries
§ extra shifts
o Inventory
o Subcontracting
o Product Mix
• DEMAND
o Pricing
o Promotion
o Customer Service
o Backorders

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 National Institute of Technology Calicut Department of Mechanical Engineering

Composite Sales
Quantity

Furnace Sales

Air Conditioner Sales

Jan Feb Mar Apr May JuneJuly Aug Sep Oct Nov Dec
Fig. 5 Demand Effect: Contracyclical Products

Current Status
production rates
work force size
inventory levels

Aggregate Plan
Demand Forecasts
Aggregate production rates
Customer Orders Planning work force size
Model inventory levels

Capacity Constraints
equipment
personnel
materials
overtime
extra Shifts
subcontracting

Fig. 6 Aggregate Planning Function

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 National Institute of Technology Calicut Department of Mechanical Engineering

The Aggregate Planning Problem

§ The general form can be stated as follows:
Given a set of (usually monthly) forecasts of demand for a single product, or some
measure of output that is common across several products, what should be specified
for each period in terms of i) Size of work force Wt ii) Rate of production Pt iii)
Quantity shipped St
Minimise the expected total cost over a given planning interval
§ The cost components included:
Ø Cost of regular payroll and overtime
Regular time cost is the cost of producing a unit of output during regular working
hours, including direct and indirect labours, materials and manufacturing expenses
Overtime cost is the cost associated with using manpower beyond normal working
hours
Ø Production rate change costs
The expenses incurred in altering the production rate substantially from one period to
the next including such items as cost of layoffs, hiring, training, learning and so on
Ø Inventory associated costs
The cost associated with carrying or not carrying inventory
§ The definition of aggregate planning problem considered three variables: Wt, Pt and St.
They are measured in per period (month) t basis.
§ The resulting inventory at the end of the period t, It is
It = It-1 + Pt - St
(The variable Wt does not appear because any set level of Wt, in turn determine the
possible range of values that Pt can assume)
§ The backlog of order at the end of the period t, Bt is
Bt = Bt-1 + Dt - Pt
Dt = actual (or forecasted) demand in period t
Production planning under constant average demand in periods of planning horizon
§ The solution to the problem is greatly simplified if average demand over the planning
interval is expected to be constant
§ Under such circumstances, there would be no need to consider changing the level of
production rate, nor size of the workforce, nor the planned quantity to be shipped from
period to period
§ The appropriate size of regular payroll is
Average demand rate per period
Wt =
Productivity per worker
§ Use overtime to replenish safety stock on occasions

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 National Institute of Technology Calicut Department of Mechanical Engineering

Production planning under varying average demand in periods of planning horizon

§ The complexity in the aggregate planning problem, arises from the fact that in most
situations demand per period is not constant but varies from period to period
§ Under such situations the following questions are raised:
Ø Should inventory investment be used to absorb the fluctuation in demand over the
planning period by accumulating inventories during slack periods to meet demand
in peak periods?
Ø Why not the fluctuations in demand be absorbed by varying the size of the work
force by hiring or laying off workers?
Ø Why not keep the size of the work force constant and absorb fluctuations in
demand by changing the rate of production per period by working shorter or
longer hours as necessary, including the payment of overtime?
Ø In process industries and where capacity exceeds average demand over a long
period, should periodic shutdowns be used or should the plant be throttled?
Ø Why not keep the size of the work force constant and meet the fluctuations in
demand through planned backlogs or by subcontracting excess demand?
Ø Is it always profitable to meet all fluctuations in demand or should some orders
not be accepted

Structured Approach to Aggregate Planning

1) Set policies on controllable variables
2) Establish forecast interval and horizon
3) Develop demand forecasting system
4) Select unit of aggregate capacity
5) Determine relevant cost structures
6) Apply aggregate planning techniques

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