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AGGREGATE PLANNING

Aggregate planning is the process of


developing, analyzing, and maintaining a
preliminary approximate schedule of the
overall operations of an organization. The
aggregate plan generally contains targeted
sales, forecasts, production levels, inventory
levels, and customer backlogs. This schedule
is intended to satisfy demand forecast at a
minimum cost.

TECHNIQUES FOR AGGREGATE PLANNING


Techniques for aggregate planning range from

informal trial-and-error approaches, which usually


utilize simple tables or graphs, to more formalized
and advanced mathematical techniques. William
Stevenson's textbook Production/Operations
Management contains an informal but useful trialand-error process for aggregate planning presented in
outline form. This general procedure consists of the
following steps:

1. Determine demand for each period


2. Determine capacity for each period. This

capacity should match demand, which means


it may require the inclusion of overtime or
subcontracting.
3. Identify company, departmental, or union
policies that are pertinent.

4. Determine unit cost for units produced. These

costs typically include the basic production costs


typically include the basic production costs. Also
include are the costs associated with making changes
in capacity. Inventory holding cost must also be
considered, as should storage, insurance, taxes,
spoilage, and obsolescence costs. Finally, backorder
cost must be computed. While difficult to measure,
this generally includes expediting costs, loss of
customer goodwill, and revenue loss from cancelled
orders.

5. Develop alternative plans and compute the


cost for each.

6. If satisfactory plans emerge, select the one that


best satisfies objectives. Frequently, this is the
plan with the least cost. Otherwise return to
step 5.

An example of a completed informal aggregate plan can


be seen in Figure 1. This plan is an example of a plan
determined utilizing a level strategy. Notice that
employment levels and output levels remain constant
while inventory is allowed to build up in earlier periods
only to be drawn back down in later periods as demand
increases. Also, note that backorders are utilized in order
to avoid overtime or subcontracting. The computed costs
for the individual variables of the plan are as follows:

Output costs:
Regular time = $5 per unit
Overtime = $8 per unit
Subcontracted = $12 per unit
Other costs:
Inventory carrying cost = $3 per unit per period applied to average inventory
Backorders = $10 per unit per period
Cost of aggregate plan utilizing a level strategy:
Output costs:
Regular time = $5 1,500 = $7,500
Overtime = $8 0 = 0
Subcontracted = $10 0 = 0
Other costs:
Inventory carrying cost = $3 850 = $2,400
Backorders = $10 100 = $1,000
Total cost = $10,900

A second example, shown in Figure 2, presents the same

scenario as in Figure 1 but demonstrates the use of a


combination strategy (i.e., a combination of level and
chase) to meet demand and seek to minimize costs. For
this example, let's assume that company
Figure 1

policy prevents us from utilizing backorders and limits our plan to no more than

50 units of overtime per period. Notice that the regular output level is constant,
implying a level workforce, while overtime and subcontracting are used to meet
demand on a period by period basis (chase strategy). One will notice that the
cost of the combination plan is slightly lower than the cost of the level plan.
Output costs:
Regular time = $5 1,200 = $6,000
Overtime = $8 100 = 800
Subcontracted = $12 250 = 2,500
Other costs:
Inventory carrying cost = $3 325 = 975
Backorders = $10 0 = 0
Total cost = $10,275