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Aggregate Planning

Created by Dianne H. Rivera


Email: spunkyneadi62@yahoo.com.ph
Definition:

Aggregate planning is concerned with matching supply


and demand of output over the medium time range, up
to approximately 12 months into the future.
The term aggregate implies that the planning is done
for a single overall measure of output.
It determines not only the output levels planned but
also the appropriate resource input mix to be used.
Combines appropriate resources into general terms.
Role of Aggregate Planning

Integral to part of the business planning


process
Supports the strategic plan
Also known as the production plan
Identifies resources required for operations for
the next 6 -18 months
Details the aggregate production rate and size
of work force required
The Planning Process
Long-range plans
(over one year)
Research and Development
New product plans
Capital investments
Facility location/expansion

Top
executives Intermediate-range plans
(3 to 18 months)
Sales planning
Production planning and budgeting
Operations Setting employment, inventory,
managers subcontracting levels
Analyzing operating plans

Short-range plans
(up to 3 months)
Job assignments
Operations Ordering
managers, Job scheduling
supervisors, Dispatching
foremen Overtime
Part-time help

Responsibility Planning tasks and horizon Figure 13.1


2008 Prentice Hall, Inc. 13 11
Overview of Planning Levels
Short-range plans (Detailed plans)
Machine loading
Job assignments
Job sequencing
Order quantities
Work Schedule
Intermediate plans (General levels)
General levels of:
Employment
Output
Finished-goods inventories
Subcontracting
Backorders
Long-range plans
Long term capacity
Location / layout
Product Design
Aggregate planning has certain pre-requisite
inputs which are inevitable.

They include:
Information about the resources and the facilities available.
Demand forecast for the period for which the planning has
to be done.
Cost of various alternatives and resources. This includes
cost of holding inventory, ordering cost, cost of production
through various production alternatives like subcontracting,
backordering and overtime.
Organizational policies regarding the usage of above
alternatives.
Aggregate Planning Inputs and Outputs
Input Output
Resources Total cost of plan
-Workforce/production rates
-Facilities and equipment
Cost Projected levels of:
-Inventory carrying cost Inventory
-Backorders Output
-Hiring/firing Employment
-Overtime Subcontracting
-Inventory changes Backordering
-Subcontracting
Demand forecast
Policies on workforce changes
Subcontracting
Overtime
Inventory levels/changes
Backorders
Economic,
Corporate competitive, Aggregate
strategies and political demand
and policies conditions forecasts

Establishes operations
Business Plan
and capacity strategies

Establishes
Aggregate plan
operations capacity

Master schedule Establishes schedules


for specific products

Planning Sequence
Aggregate Planning
Aggregate Operations Plan
Aggregate Operations Plan

Is concerned with setting production rates by product group or other broad


categories for the intermediate term (2 to 18 months).
The main purpose of the aggregate operations plan is to specify the
optimal combination of production rate, work-force level and inventory on
hand.
Production rate refers to the number of units completed per unit of time.
Workforce level is the number of workers needed for production.
Inventory on hand is unused inventory carried over from the previous
period.
Demand and Capacity Options

Aggregate planning strategies can be described as:

Proactive it involves demand options. It attempts to


alter demand so that it matches capacity.
Reactive it involves capacity options. It attempts to alter
capacity so that it matches demand.
Mixed involves an element of each of the above
approaches
Demand Options
Options for situations in which demand needs to be
increased in order to match capacity include:

Pricing Differential pricing is often used to reduce peak


demand or to build up demand in off-peak periods.
Advertising and Promotion Advertising, direct marketing,
and other forms of promotion are used to shift demand.
Backlog and Reservations In some cases, demand is
influenced by asking customers to wait for their orders
(backlog) or by reserving capacity in advance (reservations).
Development of complementary products Firms with
highly seasonal demands may try to develop products that
have counter cyclic seasonal trends.
Capacity Options
Options which can be used to increase or decrease
capacity to match current demand include:

Hiring and Layoff of employees The use of this variable not


only affect costs but also labor relations, productivity, and worker
morale.
Using overtime and undertime Overtime is sometimes used
for short or medium-range labor adjustments in lieu of hiring and
layoffs, especially if the change in demand is considered
temporary. Undertime refers to planned utilization of the
workforce rather than layoffs or shortened workweek.
Using part-time or temporary labor In some cases, it is
possible to hire part-time or temporary employees to meet peak
or seasonal demand.
Capacity Options

Carrying inventory In manufacturing companies, inventory can


be used as a buffer between supply and demand. Inventories for
later use can be built up during periods of slack demand.
Subcontracting This option, which involves the use of other
firms, is sometimes an effective way to increase or decrease
supply. The subcontractor may supply the entire product or only
some of the components.
Making Cooperative Arrangements These arrangements are
very similar to subcontracting in that other sources of supply are
used.
Strategies for Meeting Uneven Demand

Aggregate planners might adopt a number of strategies.


Some of the more prominent ones are the following:
Maintain a level of workforce
Maintain a steady output rate
Match demand period by period
Use combination of decision variables
Basic Strategies for Aggregate Planning

1.Level capacity strategy:


Maintaining a steady rate of regular-time output while
meeting variations in demand by a combination of options.

Advantages Disadvantages
Stable output rates Greater inventory
and workforce costs
Increased overtime
and idle time
Resource utilizations
vary over time
Level Production

Demand

Production
Units

Time

Copyright 2006 John Wiley & Sons, Inc. 13-7


2. Chase demand strategy:
Matching capacity to demand; the planned output for a
period is set at the expected demand for that period.

Advantages Disadvantages
Investment in inventory is The cost of adjusting
low output rates and/or
Labor utilization in high workforce levels
Chase Demand
Demand

Production
Units

Time

Copyright 2006 John Wiley & Sons, Inc. 13-8


Comparison of Chase and Level Strategy
Chase Demand Level Capacity

Level of labor skill required Low High

Job discretion Low High

Compensation rate Low High

Working conditions Sweatshop Pleasant

Training required per Low High


employee

Labor turnover High Low

Hire-layoff costs Low High

Amount of supervision High Low


required

Type of budgeting and Short-run Long - run


forecasting
Relevant Costs
Four costs are relevant to aggregate
planning. These relate to production costs as
well as the costs to hold inventory.

Basic production costs.


These are the production costs incurred in producing a given
product type in a given period.
Costs associated with changes in the production rate.
Typical costs in this category are those involved in hiring, training,
and layoff personnel.
Inventory holding costs.
A major component is the cost of capital tied up to inventory.
Backordering costs.
Usually these are hard to measure and include costs of expediting,
loss of customer goodwill, and loss of sales revenues resulting from
backordering.
Developing the Aggregate Plan

Step 1- Choose strategy:


level, chase, or Hybrid (combination)
Step 2- Determine the aggregate production rate
Step 3- Calculate the size of the workforce
Step 4- Test the plan as follows:
Calculate Inventory, expected hiring/firing, overtime needs
Calculate total cost of plan
Step 5- Evaluate performance:
cost, service, human resources, and operations
Key Consideration for Aggregate Planning

The Aggregate plan must balance several perspectives


Costs are important but so are:

Customer service
Operational effectiveness
Workforce morale

A successful AP considers each of these factors


Techniques for Aggregate Planning

A Cut-and-Try Approach
Linear Programming
Simulation Approach
A general procedure for aggregate planning
consists of the following steps:

1.Determine demand for each period


2.Determine capacities for each period
3.Identify policies that are pertinent
4.Determine units costs
5.Develop alternative plans and costs
6.Select the best plan that satisfies objectives.
Otherwise return to step 5.
Numerous techniques are available to help
with the task of aggregate planning.
Generally, they fall into three categories:

1.A Cut-and-Try Approach


Involves costing out various productions planning alternatives and selecting
the one that is best. Elaborate spreadsheets are developed to facilitate the
decision process. Sophisticated approaches involving linear programming
and simulation are often incorporated into these spreadsheets.
2.Linear Programming Approach
This makes it possible to evaluate an infinite number of production strategies and
find the minimum-cost alternative. It provides a powerful methodology for not only
solving the problem but evaluating other solutions that might be suggested,
relative to the best one.
3.Simulation Approach
This technique can be used to rapidly evaluate a large number of different
decision rules or production choices.
Summary of Planning Techniques
Technique Solution Characteristics
Graphical/charting Heuristic (trial Intuitively appealing, easy to
and error) understand; solution not
necessarily optimal.
Linear Optimizing Computerized; linear assumptions
programming not always valid.

Simulation Heuristic (trial Computerized models can be


and error) examined under a variety of
conditions.
Aggregate Planning in Services
Services occur when they are rendered.
Demand for service can be difficult to predict.
Capacity availability can be difficult to predict
Labor flexibility can be an advantage in services.
Most services cant be inventoried
Service capacity must be provided at the appropriate place
and time.
Aggregate Yield Management
It is defined as the process of allocating the right type of
capacity, to the right type of customer, at the right price and time
to maximize revenue.
It can be a powerful approach to make demand more
predictable, which is important to aggregate planning.
It is the process of understanding, anticipating and
influencing consumer behaviour in order to
maximize yield or profits from a fixed, perishable resource (such
as airline seats or hotel room reservations).
The application of pricing strategies to allocate capacity among
various categories of demand.
Aggregate Yield Management
From an operational perspective, yield management is
most effective when:
In a hotel setting:

Demand can be segmented by customers


Fixed costs are high and variable costs are low
Products can be sold in advance
Disaggregating the Aggregate
Plan
This means breaking down the aggregate plan into
specific product requirements in order to determine
labor requirements, materials, and inventory
requirements.
The result of disaggregating the aggregate plan is a
master budget.
Disaggregating the Aggregate Plan

Aggregate
Planning

Disaggregation

Master
Schedule
Master Schedule
It shows the planned output for individual products rather than
the entire product group, along timing of production.
It is the result of disaggregating the aggregate plan
It contains important information for marketing as well as for
production.
Master Production Schedule (MPS) indicates the quantity and
timing of planned production, taking into account desired
delivery quantity and timing as well s on-hand inventory
Master Scheduler
Evaluates impact of new orders
Provides delivery dates for orders
Deals with problems
Production delay
Revising master schedule
Insufficient capacity
Master Scheduling Process
Inputs Outputs

Beginning inventory Projected inventory

Master
Forecast Scheduling Master production schedule

Customer orders Uncommitted inventory


Projected on-hand Inventory

Projected on-hand Inventory from Current weeks


inventory
=
previous week
- requirements
Available-to-Promise (ATP)
Quantity of items that can be promised to the
customer
Difference between planned production and
customer orders already received
References:
Operations Management, Chase, R.B.,Jacobs, R.,
5th Edition Aquilano, N.J.
Roberta Russell & Operations Management
Bernard W. Taylor, III for Competitive
Copyright 2006 John Advantages with Global
Wiley & Sons, Inc. Cases, 11th Edition, 2007
Operations Management Schoeder, R.G.,
R. Dan Reid & Nada R. Operations Management,
Sanders
4th Edition Wiley 2010
Contemporary Concepts
and Cases. 3rd Edition,
Operations Management
2007
9th Edition, 2007
William J. Stevenson