CHAPTER 4

AGGREGATE PLANNING

1
 Planning Horizon
• Aggregate planning:
Intermediate-range capacity planning, usually covering 2 to 12
months. The goal of aggregate planning is to achieve a
production plan that will effectively utilize the organization’s
resources to satisfy expected demand.

Long range

Intermediate
range
Short
range

Now 2 months 1 Year

 Planning Levels

Organizations make capacity decisions on three

levels:
• Short-range plans (Detailed plans)
– Machine loading
– Job assignments
• Intermediate plans (General levels)
– Employment
– Output, and inventories
• Long-range plans
– Long term capacity
– Location / layout
 Planning Sequence

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
 Aggregate planning

• Aggregate planning begins with a forecast of aggregate

demand for the intermediate range.
• This is followed by a general plan to meet demand
requirements by setting output, employment, and finished-
goods inventory or service capacities.
• Managers must consider a number of plans, each of which
must be examined in light of feasibility and cost.
• Aggregate plans are updated periodically, often monthly, to
take into account updated forecast and other changes.
 Aggregate Plan – Managerial Inputs

Operations Distribution and marketing

Current machine capacities Customer needs
Plans for future capacities Demand forecasts
Workforce capacities Competition behavior
Current staffing level

Materials Accounting and finance

Supplier capabilities Aggregate Cost data
Storage capacity plan Financial condition
Materials availability of firm

Engineering Human resources

New products Labor-market conditions
Product design changes Training capacity
Machine standards
 Aggregate Plan – Outputs

Aggressive Alternatives
Complementary
Complementary Competitive
Competitive
Products
Products Pricing
Pricing

Reactive Alternatives
Units
Units or
or dollars
dollars
Size
Size of
of Aggregate Of
Of Backlogs,
Backlogs,
Workforce
Workforce and
and plan
backorders
backorders ,, or
or
Workforce
Workforce Adjustment
Adjustment stockout
stockout

Inventory
Inventory
Levels
Levels Production
Production Units
Units or
or
per
per month
month dollars
dollars
(in
(in units
units or
or $)
$) subcontracted
subcontracted
 Relationships of Aggregate Schedule

Aggregate
Forecast & Resource
Production
Firm Orders Availability
Planning
Work force
Inventory
Material Master Subcontractors
Requirements Production
Planning Scheduling
No, modify CRP, MRP, or MPS

Capacity Shop
Requirements Realistic? Floor
Planning Yes Schedules
 Aggregate Level Scheduling

• Aggregate Schedule:
Month Jan Feb Mar Apr May
No. of Chips 600 650 620 630 640

Master Production Schedule:

Month Jan Feb Mar Apr May
P4 1.5 ghz 300 200 310 300 340
P4 1.7 ghz 300 450 310 330 300
• Aggregate Scheduling Goals:
Meet demand , Use capacity efficiently, Meet inventory
policy, Minimize cost (Labor, Inventory, Plant &
equipment, Subcontract)
• Aggregate Scheduling Options
Capacity Demand

•Inventory •Promotion and price

•Hire and layoff •Back ordering
•Overtime or idle •Counter-seasonal product mixing
•Subcontract
•Part-time workers
 Aggregate Planning Objectives

• Minimize Costs/Maximize Profits

• Maximize Customer Service
• Minimize Inventory Investment
• Minimize Changes in Production Rates

• Minimize Changes in Workforce Levels

• Maximize Utilization of Plant and Equipment
 Examples of Capacity Adjustment to Meet
Demand
1. Producing at a constant rate and using inventory to absorb
fluctuations in demand
2. Hiring and firing workers to match demand
3. Maintaining resources for high demand levels
4. Increase or decrease working hours (overtime and under
time)
5. Subcontracting work to other firms
6. Using part-time workers
7. Providing the service or product at a later time period
(backordering)
 PLANNING STRATEGIES

• Chase Strategies
– Match demand during the planning horizon by
either
– Vary workforce or vary output rate
• Level Strategies
– Maintain a constant workforce level or constant
output rate during the planning horizon
– Constant workforce or constant output rate
• Mixed Strategies
– Combined several strategies
 PLANNING STRATEGIES

Level Production Chase Demand

Demand Demand
Production
Production
Units

Units
Time Time
 PLANNING STRATEGIES FOR AGGREGATE PLANS

Strategy Possible alternative s Possible alternative s

during slack season during peak season

1.Chase #1: vary workforce

level to match demand Layoffs Hiring

2.Chase#2: vary output to Hiring, overtime,

Layoffs, under time, vacations
match demand subcontracting

No hiring, depleting
No layoffs, building
3.Level#1: Constant workforce anticipation inventory,
anticipation inventory, under
level overtime, subcontracting,
time, vacations
backorders, stockouts

Hiring, depleting anticipation

Layoffs, building anticipation
4.Level#2: constant output inventory, overtime,
inventory, under time,
rate subcontrating, backorders,
vacations
stockouts
 Chase approach Level approach
Advantage Investment in inventory Stable output rates and
is low, Labor utilization workforce levels
is high

Disadvantage The cost of adjusting Greater inventory costs,

output rates and/or Increased overtime and
workforce levels idle time, Resource
utilizations vary over
time

Techniques for aggregate planning are classified into two categories:

•Informal trial-and-error techniques (frequently used)
•Mathematical techniques
 A GENERAL PROCEDURE FOR AGGREGATE
PLANNING

1. Determine demand for each period

2. Determine capacities (regular time, over time, and
subcontracting) for each period
3. Identify policies that are pertinent
4. Determine units costs for regular time, overtime,
subcontracting, holding inventories, back orders, layoffs, and
other relevant costs
5. Develop alternative plans and compute the costs for each
6. Select the best plan that satisfies objectives. Otherwise return
to step 5.
 MATHEMATICAL TECHNIQUES
Linear programming: Methods for obtaining optimal
solutions to problems involving allocation of scarce
resources in terms of cost minimization.
Linear decision rule: Optimizing technique that seeks to
minimize combined costs, using a set of cost-
approximating functions to obtain a single quadratic
equation.
Simulation models: Developing a computerized models that
can be tested under a variety of conditions in an attempt
to identify reasonably acceptable (although not always
optimal) solutions to problem
 PLANNING TECHNIQUES

Technique Solution Characteristics

Graphical/charting Trial and Intuitively appealing, easy to
error understand; solution not
necessarily optimal.
Linear Optimizing Computerized; linear
programming assumptions not always valid.
Linear Optimizing Complex, requires considerable
decision rule effort to obtain pertinent cost
information and to construct
model; cost assumptions not
always valid.
Simulation Trial and Computerized models can be
error examined under a variety of
conditions.
 AGGREGATE PLANNING COST

• Regular-Time Costs
• Overtime Costs
• Hiring and
Layoff Costs
• Inventory
Holding Costs
• Backorder and Stock out Costs
 EXAMPLE 1

• Materials Cost: $100/unit

• Labor: 5 hours per unit, $4/hr RT, $6/hr OT
– Subcontract $20/unit ($120 - $100 mat’l savings)
– Holding cost $1.5/unit/month
– Stockout cost $5/unit/month
– Hiring cost $200/employee
– Firing cost $250/employee
– Starting inventory 400 units, safety stock 25%
Jan Feb Mar Apr May June
Forecasted 1800 1500 1100 900 1100 1600
Demand
(units)
 EXAMPLE 1

• Goal of 25% of sales as “safety stock”

• For planning, assume safety stock never used
 HIRE AND FIRE, NO OT
Jan Feb Mar Apr May Ju
Production Requirement
(Forecast+SS-Begin Inv) 1.850 1.425 1.000 850 1.150 1
Hours needed 9.250 7.125 5.000 4.250 5.750 8
Days per month 22 19 21 21 22
Hrs/mo/worker 176 152 168 168 176
Workers needed 53 47 30 25 33
Workers hired 0 0 0 0 8
Workers Laid off 0 6 17 5 0
Production Labor Cost $ 37.000 $ 28.500 $ 20.000 $ 17.000 $ 23.000 $ 34
Hiring Cost $ - $ - $ - $ - $ 1.600 $ 4
Firing Cost $ - $ 1.500 $ 4.250 $ 1.250 $ - $

Labor cost = $ 160.000

Hiring Cost = $ 5.800
Firing Cost = $ 7.000
Total $ 172.800
 CONSTANT WORKFORCE
(40 workers per month)
Jan Feb Mar Apr May June
Starting Inv 400 8 (276) (32) 412 720
Production Req 1,850 1,425 1,000 850 1,150 1,725
Work Days 22 19 21 21 22 20
Work Hours 7,040 6,080 6,720 6,720 7,040 6,400
Actual Production 1,408 1,216 1,344 1,344 1,408 1,280
Demand Forecast 1,800 1,500 1,100 900 1,100 1,600
Ending Inventory 8 (276) (32) 412 720 400
Shortage Cost - 1,380 160 - - -
Safety Stock 450 375 275 225 275 400
Excess Inventory - - - 187 445 -
Holding Cost - - - 281 668 -

Labor Cost $ 160,000

Holding Cost $ 948
Shortage Cost $ 1,540
$ 162,488
 Jan SUBCONTRACT
Feb Mar Apr May
tion Req. 1.850 1.425 1.000 850 1.150
Days 22 19 21 21 22
Hrs 4.400 3.800 4.200 4.200 4.400
production 880 760 840 840 880
ntracted 970 665 160 10 270
ntr. Cost $ 19.400 $ 13.300 $ 3.200 $ 200 $ 5.400 $
Cost $ 17.600 $ 15.200 $ 16.800 $ 16.800 $ 17.600 $

rs = 25

ntr. Cost = $ 60.000

Cost = $ 100.000
Cost = $ 160.000
April has lowest demand
21 days * 8 hrs = 168
850*5/168 = 25.3 workers
Subcontract rest
 CONSTANT WORKERS WITH OT
# workers 38
Jan Feb Mar Apr May June
Work Days 22 19 21 21 22 20
Work Hrs 6,688 5,776 6,384 6,384 6,688 6,080
Reg. Production 1,338 1,155 1,277 1,277 1,338 1,216
Dem Forecast 1,800 1,500 1,100 900 1,100 1,600
Starting Inv 400 - - 177 554 792
Net Inv before OT (62) (345) 177 554 792 408
Units OT 62 345 - - - -
Ending Inv - - 177 554 792 408
Safety Stock 450 375 275 225 275 400
Excess Inv - - - 329 517 8
Holding Cost $ - $ - $ - $ 494 $ 776 $ 12
OT Cost $ 1,860 $ 10,350 $ - $ - $ - $ -
RT Cost $ 26,752 $ 23,104 $ 25,536 $ 25,536 $ 26,752 $ 24,320

Holding Cost = $ 1,281

OT Cost = $ 12,210
RT Cost = $ 152,000
$ 165,491

Find # workers to do all except

biggest mos in RT
Trial and error
Not enough safety stock
 EXAMPLE 2

Planners for a company that makes several models of

skateboards are about to prepare the aggregate plan that
will cover six periods. They now want to evaluate a plan
that calls for a steady rate of regular output, mainly using
inventory to absorb the uneven demand but allowing some
backlog. Overtime and subcontracting are not used
because they want a steady output. They intend to start
with zero inventory on hand in the first period. Prepare an
aggregate plan and determine its cost using the following
information. Assume a level of output rate of 300 unit per
period with regular time. Note that the planned ending
inventory is zero. There are 15 workers, and each can
produce 20 units per period.
 EXAMPLE 2

period 1 2 3 4 5 6 total
Forecast 200 200 300 400 500 200 1800

Cost:
• Regular time = $2 per skateboard
• Overtime = $3 per skateboard
• Subcontract = $6 per skateboard
• Inventory = $1 per skateboard per period on average inventory
• Back orders = $5 per skateboard per period
 Solution: Example 2

Period 1 2 3 4 5 6 total
Forecast 200 200 300 400 500 200 1800
Output
Regular 300 300 300 300 300 300 1800
Overtime - - - - - -
Subcontract - - - - - -
Output-forecast 100 100 0 (100) (200) 100 0
Inventory
Beginning 0 100 200 200 100 0
Ending 100 200 200 100 0 0
Average 50 150 200 150 50 0 600
Backlog 0 0 0 0 100 0 100
Cost
Output
Regular $600 600 600 600 600 600 $3600
Overtime - - - - - -
Subcontract - - - - - -
Hire/layoff - - - - - -
Inventory $50 150 200 150 50 0 $600
Back order 0 0 0 0 500 0 $500
Total $650 750 800 750 1150 600 $4700
 Aggregate Planning in Services

• Aggregate planning for services: takes into account projected

customer demands, equipment, capacities, and labor capabilities. The
resulting plan is a time-phased projection of service staff requirements.
• Aggregate planning for manufacturing and aggregate planning for
services share similarities in some respect, but there are some
important differences which are:
– 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
 Disaggregating the aggregate plan

• For the production plan to be translated into meaningful terms of

production, it is necessary to disaggregate the aggregate plan.
• This means breaking down the aggregate plan into specific
product requirements in order to determine labor requirements
(skills, size of workforce), materials, and inventory requirements.
• To put the aggregate production plan into operation, one must
convert, or decompose, those aggregate units into units of actual
product or services that are to be produced or offered.
 For example: televisions manufacturer may have an
aggregate plan that calls for 200 television in January, 300 in
February, and 400 in March. This company produce 21, 26,
and 29 inch TVs, therefore the 200, 300, and 400 aggregate
TVs that are to be produced during those three months must be
translated into specific numbers of TVs of each type prior to
actually purchasing the appropriate materials and parts,
scheduling operations, and planning inventory requirements.
 Master scheduling

• The result of disaggregating the aggregate plan is a master schedule showing the
quantity and timing of specific end items for a scheduled horizon, which often
covers about six to eight weeks ahead.

• The master schedule shows the planned output for individual products rather than an
entire product group, along with the timing of production.

• It should be noted that whereas the aggregate plan covers an interval of, say, 12
months, the master schedule covers only a portion of this. In other words, the
aggregate plan is disaggregated in stages , or phases, that may cover a few weeks to
two or three months.

• The master schedule contains important information for marketing as well as for
production. It reveals when orders are scheduled for production and when completed
orders are to be shipped
 Aggregate Plan to Master Schedule

Jan Feb Mar.

Aggregate
Aggregate plan
Planning 200 300 400

Disaggregation
Type Jan. Feb. Mar
21 inch 100 100 100
26 inch 75 150 200
Master Master
schedule 29 inch 25 50 100
Schedule
total 200 300 400
• Master schedule
– Determines quantities needed to meet demand
– Interfaces with
• Marketing: it enables marketing to make valid
delivery commitments to warehouse and final
customers.
• Capacity planning: it enables production to
evaluate capacity requirements
• Production planning
• Distribution planning
 Master schedule

• Inputs:
– Beginning inventory; which is the actual inventory on hand
from the preceding period of the schedule
– Forecasts for each period demand
– Customer orders; which are quantities already committed
to customers.
• Outputs
– Projected inventory
– Production requirements
– The resulting uncommitted inventory which is referred to
as available-to-promise (ATP) inventory
 REFERENCE

• William J. Stevenson , Operations Management, 9th

edition