AGGREGATE

PLANNING
The Concept of Aggregation
Aggregate planning is a strategic, high-level approach to capacity
planning, focusing on general output and resource utilization without
getting bogged down in product-specific details. It groups products or
services with similar demands to simplify planning and decision-
making. By thinking in terms of broad categories like labor hours or
output rates, planners can make overarching decisions about
employment, inventory, and output levels. This method allows
organizations to efficiently align their resources with overall demand,
avoiding the intricacies of individual product requirements and
enabling effective intermediate-range capacity planning.
An Overview of Aggregate Planning
MARKET DEMAND

PRODUCTION PLAN

ROUGH-CUT
CAPACITY
PLANNING

ADJUST THE YES

PROBLEM
PRODUCTION PLAN
NO
 600

Demand & Capacity 500

Aggregate planners aim to

400
match demand with capacity,
adjusting either to address
imbalances. They tackle not only 300
significant mismatches over the
planning period but also 200
fluctuations within it, striving for
a consistent balance between
100
demand and capacity
throughout the planning horizon.
0
1 2 3 4 5 6 7 8 9 10 11 12
 Decision Variable and Costs
PRICING PROMOTION

Businesses use pricing strategies to

Promotional efforts aim to adjust demand
redistribute demand from peak to off-peak
levels to match available capacity.
times, employing methods like discounts
Effective promotion requires careful timing
during less busy hours to better align
and knowledge of consumer response
demand with capacity. The success of
patterns, though it carries the risk of
these strategies largely depends on the
unintended effects on demand.
price elasticity of the service or product.
 Decision Variable and Costs
BACK ORDERS NEW DEMAND

Organizations create new demand in off-

Allowing back orders lets organizations
peak times to better utilize capacity and
shift demand to later periods, depending
smooth out demand fluctuations. This can
on customer willingness to wait. This
involve offering new services or products
approach faces challenges, including
that complement existing ones, thus
potential lost sales and customer
ensuring more consistent use of resources
dissatisfaction.
across varying demand periods.
BASIC OPTIONS FOR ALTERING THE AVAILABILITY OF CAPACITY
ARE THE FOLLOWING:

01
01 Hire and Fire Workers

02
02 Overtime/Slack time

03
03 Part-time workers

04
04 Inventories

05
05 Subcontracting
 TECHNIQUES FOR AGGREGATE PLANNING
01
01 DETERMINE DEMAND FOR EACH PERIOD

02
02 DETERMINE CAPACITIES FOR EACH PERIOD

03 DETERMINE COMPANY OR DEPARTMENTAL POLICIES

03
THAT ARE PERTINENT.
04
04 DETERMINE UNIT COSTS FOR REGULAR TIME, OVERTIME, SUBCONTRACTINGM
HOLDING INVENTORIES, BACK ORDERS, AND OTHER RELEVANT ONES

05
05 DEVELOP ALTERNATIVE PLANS AND COMPUTE THE COST
FOR EACH
05
06 IF SATISFACTORY PLANS EMERGE, SELECT THE ONE THAT BEST SATISFIES
OBJECTIVES, OTHERWISE RETURN TO STEP 5
 INFORMAL TECHNIQUES
Informal aggregate planning uses visual tools like tables and graphs
to compare demand with capacity, helping to devise various
strategies based on cost evaluations. These tools, which can show
cumulative data or period-by-period breakdowns, assist in visualizing
plans but may not always lead to the optimal solution. Examples
include strategies that either adjust inventory to meet demand
fluctuations or combine lower regular output with overtime, allowing
for some backlog accumulation.
 Mathematical Techniques

Linear Programming
Linear programming models optimize resource
allocation to minimize costs or maximize profits in
aggregate planning, focusing on reducing labor,
overtime, subcontracting, and inventory costs under
certain constraints. E.H. Bowman's transportation-type
model aligns demand with capacity and minimizes costs
by detailing capacities and costs for each period. This
model calculates holding and backorder costs over time
and can prevent backlogs by assigning high costs to
undesirable outcomes. However, it assumes linear
relationships between variables, fixed output rates, and
prioritizes a single objective, often overlooking the
complexity of multiple goals.
 Mathematical Techniques
Goal Programming
Goal programming allows setting
and prioritizing multiple goals within
linear programming, aiming to
optimize these goals according to
their importance, with notable
applications in aggregate planning.
LINEAR DECISION RULE
The Linear Decision Rule, developed by Holt,
Modigliani, Muth, and Simon in the 1950s,
optimizes costs related to workforce and
inventory management through quadratic and
linear equations. It helps plan output and
workforce size but has limitations, including
reliance on specific cost function assumptions,
the need for extensive cost data collection, and
sometimes producing impractical solutions. It
mainly serves as a benchmark for evaluating
other planning techniques.
 Mathematical Techniques
Management Coefficient
E.H. Bowman's Heuristic model,
using management coefficients,
aims to improve decision-making
by incorporating past managerial
performance through multiple
regression analysis. It focuses on
enhancing existing processes
rather than inventing new
optimization methods.
Parametric Production
Planning
E.H. Bowman's Heuristic model,
using management coefficients,
aims to improve decision-
making by incorporating past
managerial performance
through multiple regression
analysis. It focuses on
enhancing existing processes
rather than inventing new
optimization methods.
Simulation Models
Simulation models offer a way to
explore aggregate planning under
various scenarios to identify
acceptable solutions, although they're
not always optimal and haven't seen
widespread adoption beyond trial and
error. Most organizations prefer
relying on experience and trial-and-
error approaches, possibly due to the
complexity or perceived limitations of
more sophisticated models. However,
goal programming and simulation are
gaining popularity, indicating ongoing
research and interest in refining
aggregate planning strategies.
DISAGGREGATING THE
AGGREGATE PLAN
Disaggregating the aggregate plan is crucial for turning broad production
goals into specific operational plans, detailing product types, labor needs,
materials, and inventory. This process results in a master schedule that
outlines specific quantities and timing for production, serving as the basis for
short-term planning. While the aggregate plan might cover a year, the master
schedule is more short-term and regularly updated to adapt to production
changes. Although essential, disaggregating can be complex and requires
significant effort to ensure the aggregate plan aligns with actual production
requirements.
THANK
YOU