Aggregate Production Planning

(APP)
AGGREGATE
PRODUCTION
PLANNING
 Introductio
n
Aggregate production planning

Dr. Dileep Singh

IS MEDIUM-TERM CAPACITY PLANNING
OVER A TWO TO EIGHTEEN MONTH
PLANNING HORIZON. IT INVOLVES
DETERMINING THE LOWEST-COST
METHOD OF PROVIDING THE
ADJUSTABLE CAPACITY FOR MEETING
PRODUCTION REQUIREMENTS.
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 CAPACITY DECISIONS
HIERARCHY

Linkages
Facilities
Planning

Dr. Dileep Singh

Aggregate
Planning

Scheduling

Time Frame Facilities Planning

Aggregate Planning
Scheduling 4
Time
 PRODUCTION
PLANNING

 Long Range Planning

 Strategic planning (1-5 years)

Dr. Dileep Singh

 Medium Range Planning
 Employment, output, and inventory levels (2-18
months)
 Short Range Planning
 Jobscheduling, machine loading, and job
sequencing (0-2 months)

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 PLANNING HORIZON

Aggregate planning: Intermediate-

Dr. Dileep Singh

range capacity planning, usually
covering 2 to 18 months.

Long range

Intermediate
range
Short
range

Now 2 months 18 Months 6

 PRODUCTION PLANNING
HORIZON

PLANNING HORIZON 1. LONG RANGE

- Business Forecasting
- Product & Market Planning
5 YEARS - Capacity Planning

Dr. Dileep Singh

- Location & Layout
- Financial Planning

2. MEDIUM RANGE
- Aggregate Production Planning
1 YEAR - Product Forecasting
- Master Production Scheduling
- Employment / Output / Inventory

3. SHORT RANGE

- Materials & Purchasing Control

2 - 3 MONTHS
- Scheduling
- Machine Loading
- Job Assignments 7
 Aggregate Production
Planning

Objective:
To develop a plan that will satisfy or meet demand

Dr. Dileep Singh

within the limits of available resources, at least cost to
the organization.

Includes: Optimal combination of production rate,

work force level and inventory.

Time Frame: Two to eighteen months.

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 Aggregate Production
Planning

Strategies for Adjusting the

Output (Production) Rate

Dr. Dileep Singh

1. Vary the work force level.
2. Vary the inventory level.
3. Vary the production level.
4. Vary the level of customer service (back orders).
5. Sub-contract some of the production requirements.
6. Alter the peak output capacity.

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 WHY AGGREGATE
PLANNING IS
NECESSARY

 Fully load facilities and minimize overloading

and under loading

Dr. Dileep Singh

 Make sure enough capacity available to
satisfy expected demand
 Plan for the orderly and systematic change of
production capacity to meet the peaks and
valleys of expected customer demand
 Get the most output for the amount of
resources available

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 AGGREGATE PRODUCTION
PLANNING INVOLVES
MANAGING...

 Work force levels - the number of workers

required for production.
 Production rates - the number of units

Dr. Dileep Singh

produced per time period.
 Inventory levels - the balance of unused
units carried forward from the previous period.

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 COMMON OBJECTIVES
OF PRODUCTION
PLANNING...

MINIMIZE:
cost, inventory levels, changes in work

Dr. Dileep Singh

force levels, use of overtime, use of
subcontracting, changes in production
rates, plant/personnel idle time
MAXIMIZE:
profits, customer service

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 Table 1: Preparing an
inventory balance
Month Forecas Producti Ending Ending balance No. of
t on @ inventory with 1003 on working days
16/day balance Jan

January 220 352 133 1136 22

February 90 288 331 1334 18

Dr. Dileep Singh

March 210 336 457 1460 21
April 396 352 413 1416 22
May 616 352 149 1152 22
June 600 320 -131 872 20
July 375 336 -170 833 21
August 780 320 -630 373 20
Septembe 265 368 -527 476 23
r
October 775 304 -998 5 19
November 325 320 -1003 0 20 13
December 175 320 -858 145 20
 Table 1: Preparing an
inventory balance

Average inventory = 766.8

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Average forecasted demand = 16/day
(Carrying costs based upon average
inventory)
Max inventory = 1460 (Storage cost is
based upon the maximum number of units
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needing storage at one time)
 Table 1: Preparing an
inventory balance

Case let 1
With reference to the data in table 1, the
company has determined that to follow a plan

Dr. Dileep Singh

of meeting demand by varying the size of work
force would result in hiring and layoff cost
estimating at Rs. 22,000. If the cost of
producing each unit is Rs 100, the carrying
costs/per annum are 20% of average inventory
value and storage cost are Rs 9/unit. Analyze
the case and suggest which plan is beneficial
that is varying inventory or varying employment
(hiring/layoff).
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 Table 1: Preparing an
inventory balance

Case let 1
Cost for the two alternatives:

Dr. Dileep Singh

Case 1 (Varying inventory):
Carrying cost = Rs 766.8 x 100 x 0.2 = Rs
15,336
Storage cost = 9 x 1460 = Rs 13,140
Total Cost = Rs 28,476

Case 2 (Varying workforce):

Hiring/layoff cost = Rs 22,000
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So, hiring and layoff is the better option in this
cost structure.
 Table 1: Preparing an
inventory balance
Case 2
A company has a monthly demand as shown in Table 1.
The organization policy is to have 10% of month forecast
as safety stock. The number of days available in each

Dr. Dileep Singh

month is also shown. There is no inventory available at
the beginning of the first month i.e. January.
Table 1: Monthly demand of a company
Month Jan Feb Mar Apr May Jun Jul Aug
Beginning 0 1000 1500 3000 2700 2500 2000 1600
Inventory
Forecast 10,00 15,00 30,00 27,00 25,00 20,00 16,00 20,00
demand 0 0 0 0 0 0 0 0
Safety 1000 1500 3000 2700 2500 2000 1600 2000
Stock
(10%)
Prod. 11,00 15,50 31,50 26,70 24,80 19,50 15,60 20,40 17
Required 0 0 0 0 0 0 0 0
Operating 18 22 25 20 25 15 20 25
days
 Table 1: Preparing an
inventory balance
Case 2
Cost for the organization is as follows:
• Inventory holding cost: Rs 2/unit/month
• Duration of shift: 8 Hours

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• Hourly wage rate: Rs 8
• Stock out cost/unit: Rs 5
• Hourly overtime wage rate: Rs 10
• Subcontracting cost/unit: Rs 105 with Rs 5
premium
• Labour hour/unit: 4 hours
• Layoff cost/worker: Rs 500
• Hiring cost/worker: Rs 400
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 Table 1: Preparing an
inventory balance
Case 2
Three potential plans are suggested:
1.Produce to exact production requirement by
varying the size of work force on regular hours.

Dr. Dileep Singh

Assume there are 250 workers available in January.
2.Make a constant work force of 518 workers. Assume
no subcontractors are available and inventory will
fluctuate with stock out filled from the following
month’s production.
3.Produce by the fixed work force of 500 regular
times and subcontract all excess demands over the
period production. Inventory will increase when
production exceeds demand, no stock out is
permitted.

Based on the said information, Analyze the case 19

and suggest the best plan.
 Table 1: Preparing an
inventory balance
Case 2
Tabulate the calculation for each of the three plans
respectively in Table 2, Table 3 and Table 4.
Table 2: Calculation for Plan 1

Dr. Dileep Singh

Mont Unit Producti Avail Workers No. of Laid off Hiring Firing
h Prod. on able Require workers Cost Cost
required Hours Hour d hired workers
required s
Jan 11,000 44,000 144 306 56 0 22,400 0
Feb 15,500 62,000 176 352 46 0 18,400 0
Mar 31,500 12,6,000 200 630 278 0 1,11,20 0
0
Apr 26,700 10.68,00 160 668 38 0 15,200 0
May 24,800 99,200 200 496 0 172 0 86,000
Jun 19,500 78,000 120 650 154 0 61,600 0
Jul 15,600 66,400 160 415 0 235 0 1,17,50
0
20
Aug 20,400 81,600 200 408 0 7 0 3500

Total Cost = Rs
 Table 1: Preparing an
inventory balance
Case 2
Table 3: Calculation for Plan 2 (constant work force of 518
workers
Month Unit Prod. Hour/ month/ Inventory Inventory
required worker produced balance

Dr. Dileep Singh

Jan 11,000 144 18,648 7648
Feb 15,500 176 22,792 14,940
Mar 31,500 200 25,900 9340
Apr 26,700 160 20,720 3360
May 24,800 200 25,900 4460
Jun 19,500 120 15,540 500
Jul 15,600 160 20,720 5620
Aug 20,400 200 25,900 11,120

Total =
56,988 21
Total cost = Rs 56,988 x 2 = Rs
1,13,976
 Table 1: Preparing an
inventory balance
Case 2
Table 4: Calculation for Plan 3 (work force =
500)
Month Unit Prod. Hour/month/ Inventory Inventory Subcont
required worker produced balance racted

Dr. Dileep Singh

Jan 11,000 144 18,000 7000
Feb 15,500 176 22,000 13,500
Mar 31,500 200 25,000 7000
Apr 26,700 160 20,000 300
May 24,800 200 25,000 500
Jun 19,500 120 15,000 - 4000
Jul 15,600 160 20,000 4400
Aug 20,400 200 25,000 9000
Total =
Total cost = Rs 41,700 x 2 + 4000 x 5 = 41,700
Rs 1,03,400 22
Thus, plan 3 gives the least cost.
Dr. Dileep Singh
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Thank you