Aggregate Planning

Aggregate Planning
Technology and Operation Management

SBM - ITB
Aggregate Plan Strategy
Level Strategy
▶Daily production is uniform
▶Use inventory or idle time as buffer
▶Stable production leads to better quality and
productivity
Chase Strategy
▶Match output rates to demand forecast for each
period
▶Vary workforce levels or vary production rate
▶Favored by many service organizations
Mixed Strategy
▶A mixed strategy may be the best way to achieve
minimum costs
▶There are many possible mixed strategies
▶Finding the optimal plan is not always possible
Aggregate PlanExamples
Example Data
Period January February March April May
Demand 174 80 249 129 165
Working days 24 18 25 20 26
Capacity Overview Cost of Production

Regular time Wage $8/ hour
Currently Number of 4 workers
Workers Overtime Wage $11/ hour
Beginning Inventory 20 unit Inventory $6 / unit / month
Production process 5 hour / unit Lost Sales $ 120 / unit
Backorder $ 58 / unit
Maximum overtime 30% of monthly regular
time
Subcontract $ 60 / unit
Regular time working 8 hours / day Hiring $ 450 / worker
Layoff $ 650 / worker
Subcontract’s capacity is limitless.

Examples
Consider these strategies :
• Level Strategy with current workforce + overtime + backorder
• Level Strategy with current workforce + overtime + lost sales
• Level Strategy to fulfill minimum demand + subcontract
• Pure Chase Strategy
*Round up the calculation for number of workers, unit produced in
regular time and unit produced in overtime*
Backorder VS Lost Sales
An unmet demand can be categorized either backorder of lost sales.
Backorder policy  the amount of unit will be accounted into unit

needed for next month and delivered to the customers.
Lost Sales policy  the amount of unit will not be accounted into unit
needed to be produced in the next month, the company lost the
opportunity of having the sales.
Level Strategy with current
workforce+ Overtime + Backorder
Example Data
Demand 174 80 249 129 165

time

Level Strategy with current Workforce +
Overtime + Backorder (Production Calculation)
Regular production rate unit =
× ℎ × working days
Production t 1
Unit needed =
+ ℎ
− ℎ
Overtime will be used if Unit Needed > Regular production rate
Consider first the Maximum production rate in Overtime
Maximum overtime production rate=

× ℎ × working days × %
Production time for 1 unit
If (Unit Needed – Regular Production rate) > Maximum Overtime Production

then use maximum overtime production
else use only overtime production = unit needed – regular production rate
If the Regular Production rate > Unit Needed  Excess production goes
into inventory
= −
If Unit Needed < Regular production rate + Overtime production 

Backorder occurred
= −( . + )
Overtime + Backorder (Cost Calculation)
Regular production cost =
. × ℎ ×
× .ℎ
Inventory cost=
×
Backorder cost =
×
Overtime + Backorder (Cost Calculation)
If overtime production is used in its maximum capacity
Overtime cost =
. × . ℎ ×
×% × ℎ
If overtime production is used less than its maximum capacity

Overtime cost =
.
× 1 × ℎ
Overtime + Backorder (January)
Number of workers = 4 workers
1 day regular working = 8 hours
Hours needed for producing 1 unit = 5 hours
January working days = 24 days
24 × 4 × 8
= = 153.6
5
→ 153.6 = 154
Overtime + Backorder(January)
Beginning inventory in January = 20 unit
Demand for January = 174 unit
Unit needed in January = 174 – 20 unit = 154 unit
Ending Inventory in January = Total unit produced in January – Unit
Needed in January = 154 – 154 = 0 unit
Regular Working Cost in January =
4 × 8 × 24 × $ 8 = $ 6,144
Overtime + Backorder(February)
February working days = 18 days
18 × 4 × 8
= = 115.2
5
→ 115.2 = 116
Ending Inventory in January = Beginning inventory in February = 0 unit
Demand for February = 80 unit
Unit needed in February = 80– 0 = 80 unit
Ending Inventory in Feb =
Total unit produced in Feb – Unit Needed in Feb = 116 – 80 = 36 unit
Regular Working Cost in February =
4 × 8 × 18 × $ 8 = $ 4,608
Inventory Cost in February =

36 × $ 6 = $ 216
Overtime + Backorder(March)
March working days = 25 days
25 × 4 × 8
ℎ= = 160
5
Ending Inventory in February= Beginning inventory in March = 36 unit
Demand for March = 249 unit
Unit needed in March = 249 – 36 = 213 unit
Total unit Produced in March < Unit Needed in March
!!Need to produce unit in Overtime !!

Overtime = max 30% of monthly hours
Unmet demand after Regular production= 213 – 160 = 53 unit
%× × ×
Max overtime produced in March = = 48
Unmet demand after overtime = 53 – 48 = 5 unit

(using maximum overtime capacity to meet the demand)
Backorder = 5 unit
Regular Working Cost in March =
4 × 8 × 25 × $ 8 = $ 6,400
Overtime Cost in March =
4 × 8 × 25 × $ 11 × 30% = $ 2,640
Backorder Cost in March =
5 × $ 58 = $290
Overtime + Backorder (April)
April working days = 20 days
20 × 4 × 8
= = 128
5
Overtime + Backorder (April)
Ending Inventory in March= Beginning inventory in April = 0 unit
Demand for April = 129 unit
Unit needed in April = 129 – 0 + 5 = 134 unit
Total unit Produced in April < Unit Needed in April

Overtime + Backorder(April)
%× × ×
Max overtime produced in April = = 38.4
 roundup(38.4) = 39 unit
Overtime capacity used in April = 6 unit

Overtime + Backorder(April)
Regular Working Cost in April =
4 × 8 × 20 × $ 8 = $ 5,120
Overtime Cost in April =
6 × 5 × $ 11 = $ 330
!!Calculate until the end of demand period!!

Level Strategy with current
workforce+ Overtime + Lost Sales
Example Data
Demand 174 80 249 129 165

time

Overtime + Lost Sales (Production Calculation)
P 1
Unit needed =
− ℎ
Overtime will be used if Unit Needed > Regular production rate
Consider first the Maximum production rate in Overtime
Maximum overtime production rate=

× ℎ × working days × %
Production time for 1
If (Unit Needed – Regular Production rate) > Maximum Overtime Production

then use maximum overtime production
else use only overtime production = unit needed – regular production rate
If the Regular Production rate > Unit Needed  Excess production goes
into inventory
= −
If Unit Needed < Regular production rate + Overtime production  Lost

Sales occurred
= −( . + )
Overtime + Lost Sales(Cost Calculation)
. × ℎ ×
× .ℎ
Inventory cost=
×
Lost sales cost =
×
Overtime + Lost Sales (Cost Calculation)
If overtime production is used in its maximum capacity
Overtime cost =
. × . ℎ ×
×% × ℎ
If overtime production is used less than its maximum capacity

Overtime cost =
.
× 1 × ℎ
Overtime + Lost Sales (January)
24 × 4 × 8
= = 153.6
5
→ 153.6 = 154
Overtime + Lost Sales (January)
Beginning inventory in January = 20 unit
Demand for January = 174 unit
Unit needed in January = 174 – 20 unit = 154 unit
Ending Inventory in January = Total unit produced in January – Unit
Needed in January = 154 – 154 = 0 unit
Regular Working Cost in January =
4 × 8 × 24 × $ 8 = $ 6,144
Overtime + Lost Sales (February)
18 × 4 × 8
= = 115.2
5
→ 115.2 = 116
Ending Inventory in January = Beginning inventory in February = 0 unit
Demand for February = 80 unit
Unit needed in February = 80– 0 = 80 unit
Ending Inventory in Feb = Total unit produced in Feb – Unit Needed in
Feb = 116 – 80 = 36 unit
Regular Working Cost in February =
4 × 8 × 18 × $ 8 = $ 4,608
Inventory Cost in February =

36 × $ 6 = $ 216
Overtime + Lost Sales (March)
March working days = 25 days
25 × 4 × 8
ℎ= = 160
5
Ending Inventory in February= Beginning inventory in March = 36 unit
Demand for March = 249 unit
Unit needed in March = 249 – 36 = 213 unit
Total unit Produced in March < Unit Needed in March

%× × ×
Max overtime produced in March = = 48
Unmet demand after overtime = 53 – 48 = 5 unit

(using maximum overtime capacity to meet the demand)
Lost Sales = 5 unit

Regular Working Cost in March =
4 × 8 × 25 × $ 8 = $ 6,400
Overtime Cost in March =
4 × 8 × 25 × $ 11 × 30% = $ 2,640
Lost Sales Cost in March =
5 × $ 120 = $600
Overtime + Lost Sales (April)
April working days = 20 days
20 × 4 × 8
= = 128
5
Ending Inventory in March= Beginning inventory in April = 0 unit
Demand for April = 129 unit
Unit needed in April = 129 – 0 = 129 unit
Total unit Produced in April < Unit Needed in April

Overtime + Lost Sales(April)
%× × ×
Max overtime produced in April = = 38.4
 Roundup (38.4) = 39 unit
Overtime capacity used in April = 6 unit

Regular Working Cost in April =
4 × 8 × 20 × $ 8 = $ 5,120
Overtime Cost in April =
1 × 5 × $ 11 = $ 55

Level Strategy for minimum
demand + Subcontract
Example Data
Demand 174 80 249 129 165

time

Level strategy for minimum demand +
Subcontract (Production Calculation)
Number of Workforces needed for fulfill minimum demand
× 1
=
× . ℎ
In this example case:
Minimum Demand = February’s Demand = 80 unit
Number of Workforce needed for minimum demand =

80 × 5
= 2.78 → 2.78 = 3
18 × 8
Total workforce for every month = 3 workers

Need to layoff 1 worker because currently there are 4 workers
Unit needed =
− ℎ
If the Regular Production rate > Unit Needed  Inventory
= −
If Unit Needed < Regular production rate  Subcontract
= − .
Subcontract (Cost Calculation)
. × ℎ ×
× .ℎ
Inventory cost=
×
Subcontract cost =
×
Subcontract (Cost Calculation)
If layoff occurs
Layoff cost =
. ×
If hiring occurs
Hiring cost =
. ℎ ×
Subcontract (January)
Current Number of workers = 4 workers
Number of workers Needed = 3 workers
Layoff = 4 – 3 = 1 worker
24 × 3 × 8
= = 115.2
5
→ 115.2 = 116
Beginning Inventory January = 20 unit
Demand January = 174 unit
Unit Needed in January = 174 – 20 = 154 unit
Total unit produced in January < Unit needed in January
!!Need to Subcontract !!
Subcontract unit = 154 – 116 = 38 unit

Regular working hours cost in January =
3 × 8 × 24 × $8 = $4,608
Subcontract cost in January =
38 × $60 = $2,280
Layoff Cost in January =
1 × $ 650 = $ 650
Subcontract (February)
18 × 3 × 8
= = 86.4
5
→ 86.4 = 87
Ending Inventory January = Beginning inventory February = 0 unit
Demand February = 80 unit
Unit Needed in January = 80 – 0 = 80unit
Ending Inventory in February = 87 – 80 = 7 unit

Regular working hours cost in February =
3 × 8 × 18 × $8 = $3,456
Inventory cost in February=
7 × $6 = $42

Chase Strategy
Example Data
Demand 174 80 249 129 165

time

Chase Strategy (Production Calculation)
Calculate the number of workforces needed for each period :
Number of workforces needed for each period
× 1
=
× . ℎ
!! Don’t forget to roundup the result!!
Regular Production Rate =

= − ℎ
If the Regular Production rate > Unit Needed  Inventory
= −
Number of Workforces in Previous period > Number of Workforces
needed in Current period  Lay off
= . − .
Number of Workforces in Previous period < Number of Workforces

needed in Current period  Hiring
= . − .
Chase Strategy (Cost Calculation)
. × ℎ ×
× .ℎ
Inventory cost=
×
Chase Strategy (Cost Calculation)
If layoff occurs
Layoff cost =
. ×
If hiring occurs
Hiring cost =
. ℎ ×
Chase Strategy (January)
Demand in January = 174 unit
Beginning Inventory in January = 20 unit
Unit Needed in January = 174 – 20 = 154 unit
Working days in January = 24 days
154 × 5
= = 4.014
8 × 24
→ 4.014 = 5
Current number of workforces = 4 workers
Hiring in January = 5 – 4 = 1 workers
24 × 5 × 8
= = 192
5
Ending Inventory in January = 192 – 154 = 38 unit

Regular working hours in January =
5× 8 × 24 × $8 = $7,680
Inventory Cost in January=
38 × $6 = $228
Hiring Cost in January =
1 × $ 450 = $450
Chase Strategy (February)
Demand in February = 80 unit
Ending inventory in January = Beginning Inventory in February = 38 unit
Unit Needed in February = 80 – 38 = 42 unit
Working days in February = 18 days
42 × 5
= = 1.458
8 × 18
→ (1.458) = 2
Number of workers in January = 5 workers
Layoff in February= 5 – 2 = 3 workers
18 × 2 × 8
= = 57.6
5
→ 57.6 = 58
Ending Inventory in February = 58 – 42 = 16 unit

Regular working hours in February =
2 × 8 × 18 × $8 = $2,304
Inventory Cost in February=
16 × $6 = $96
Layoff Cost in February =
3 × $ 650 = $1,950
Chase Strategy (March)
Demand in March = 249 unit
Ending inventory in February = Beginning Inventory in March = 16 unit
Unit Needed in March = 249 – 16 = 233 unit
Working days in March = 25 days
233 × 5
ℎ= = 5.825
8 × 25
→ (5.825) = 6
Number of workers in February = 2 workers
Hiring in March = 6 – 2 = 4 workers
25 × 6 × 8
ℎ= = 240
5
Ending Inventory in March = 240 – 233 = 7 unit

Regular working hours in March =
6× 8 × 25 × $8 = $9,600
Inventory Cost in March=
7 × $6 = $42
Hiring Cost in March =
4 × $ 450 = $1,800

Aggregate Planning

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Aggregate Planning

Technology and Operation Management

Capacity Overview Cost of Production

Subcontract’s capacity is limitless.

Backorder policy  the amount of unit will be accounted into unit

Capacity Overview Cost of Production

Subcontract’s capacity is limitless.

Maximum overtime production rate=

If (Unit Needed – Regular Production rate) > Maximum Overtime Production

If Unit Needed < Regular production rate + Overtime production 

If overtime production is used less than its maximum capacity

Inventory Cost in February =

!!Need to produce unit in Overtime !!

Unmet demand after overtime = 53 – 48 = 5 unit

!!Need to produce unit in Overtime !!

Unmet demand after Regular production= 134 – 128 = 6 unit

Overtime capacity used in April = 6 unit

!!Calculate until the end of demand period!!

Capacity Overview Cost of Production

Subcontract’s capacity is limitless.

Maximum overtime production rate=

If (Unit Needed – Regular Production rate) > Maximum Overtime Production

If Unit Needed < Regular production rate + Overtime production  Lost

If overtime production is used less than its maximum capacity

Inventory Cost in February =

!!Need to produce unit in Overtime !!

Unmet demand after overtime = 53 – 48 = 5 unit

Lost Sales = 5 unit

!!Need to produce unit in Overtime !!

Unmet demand after Regular production= 129 – 128 = 1 unit

Overtime capacity used in April = 6 unit

!!Calculate until the end of demand period!!

Capacity Overview Cost of Production

Subcontract’s capacity is limitless.

Number of Workforce needed for minimum demand =

Total workforce for every month = 3 workers

If the Regular Production rate > Unit Needed  Inventory

If Unit Needed < Regular production rate  Subcontract

Subcontract unit = 154 – 116 = 38 unit

Ending Inventory in February = 87 – 80 = 7 unit

!!Calculate until the end of demand period!!

Capacity Overview Cost of Production

Subcontract’s capacity is limitless.

Regular Production Rate =

If the Regular Production rate > Unit Needed  Inventory

Number of Workforces in Previous period < Number of Workforces

Ending Inventory in January = 192 – 154 = 38 unit

Layoff in February= 5 – 2 = 3 workers

Ending Inventory in February = 58 – 42 = 16 unit

Hiring in March = 6 – 2 = 4 workers

Ending Inventory in March = 240 – 233 = 7 unit

!!Calculate until the end of demand period!!

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