Aggregate Planning

Session 18

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Introduction
Organization make capacity decision at three level

Long Term – Capacity, location, layout, products

Intermediate – Employment, Output and Inventories

Short term – Production plan, scheduling, workers,

transportation etc

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Aggregate Planning
Capacity planning decision done over a time period if
of 2 to up to 18 months

Planning is done at products grouped together

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11-3
 Why organizations need to do aggregate planning?
Planning
For example, if the plan involves hiring -It takes
time to hire and train workers

Strategic
Not possible to predict with accuracy the timing
and volume of demand for individual items.

Budgeting
It affects, cost, capacity utilization, employment
levels and customer satisfaction
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11-4
Dealing with Variation in Capacity
Capacity
Maintain Excess capacity – when loss of sales is greater
than cost of excess capacity.
Maintaining inventory
Overtime
Hiring temporary workers
Subc

11-5
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11-5
Options to deal with demand using Marketing Tactics
 Forecasting
 Most organizations use rolling 3, 6, 9, and 12 month forecasts
 Pricing
 Used to shift demand from peak to off-peak periods
 Price elasticity is important
 Promotion
 Advertising and other forms of promotion
 Back orders
 Orders are taken in one period and deliveries promised for a
later period
 New demand
 Create new demand by acquiring new customers to absorb
excess capacity generated due to peak time demands

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11-7
Strategies to use Capacity to meet uneven
demand
1. Level Capacity
2. Chase Demand

Use a combination

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Level capacity strategy:
Maintaining a steady rate of regular-time output
while meeting variations in demand by a
combination of
Inventories,
overtime,
part-time workers,
subcontracting, and
back orders
Advantages
 Stable output rates and workforce
Disadvantages
 Greater inventory costs
 Increased overtime
 Resource utilizations vary over time
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Chase Approach
Capacities (number of workforce, output rates)
are adjusted to match demand requirements over
the planning horizon

 Advantages
Investment in inventory is low
Labor utilization in high

 Disadvantages
The cost of adjusting output rates and/or workforce levels

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How to Choose a Strategy
Strategy depends on
 Company policy – may discourage layoffs
 Flexibility – not present in organization following
continuous process like refinery
 Costs – The cost of producing less quantity, hiring and
training, inventory costs may be prohibitive.

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Implementation of Aggregate Planning

Mathematical technique – Linear Programming and

Simulation

Trial and error technique – More frequently used

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Mathematical Techniques
Linear programming models
Methods for obtaining optimal solutions to
problems in terms of cost minimization or profit
maximization.
Simulation models
Computerized models that can be tested under
different scenarios to identify acceptable
solutions to problems

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11-14
Trial-and-Error Techniques
Consist of developing simple tables or graphs
Enable planners to visually compare projected
demand requirements with existing capacity
Alternatives are compared based on their total
costs
Disadvantage is that it does not necessarily result
in an optimal aggregate plan

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11-15
Procedure for Implementing Trial and Error Aggregate Planning

1. Determine demand for each period

2. Determine capacities for each period – Regular Time, Overtime and

Subcontracting
3. Identify company policies – How much safety stock can be maintained,
Is hire and fire policy permitted etc
4. Determine unit costs –
1. Production cost during regular time, over time and subcontracting

2. Inventory holding cost

3. Backorder cost

5. Develop alternative plans and costs

6. Select the plan that best satisfies objectives. Otherwise return to step 5.

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11-16
Aggregate Planning Example - 1
• Regular output is kept steady – Level Strategy
• Inventory is used to absorb the uneven demand
• Backlog is allowed.
• Overtime and subcontracting are not used because they want steady
output.
• Start with zero inventory on hand in the first period.

Period 1 2 3 4 5 6 Total
Forecast 200 200 300 400 500 200 1,800
Costs
Output
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

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11-17
 Aggregate Planning Example (2 of 3)
Period 1 2 3 4 5 6 Total
Forecast 200 200 300 400 500 200 1,800
Output
Regular time 300 300 300 300 300 300 1,800
Overtime --- --- --- --- --- ---
Subcontract --- --- --- --- --- ---
Output 2 Forecast
Inventory
Beginning
Ending
Average
Backlog

LO 11.5 11-18
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11-18
 Aggregate Planning Example - Costs (2 of 3)
Costs
Output
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

Period 1 2 3 4 5 6 Total
Costs
Output
Regular
Overtime
Subcontracting
Inventory Costs
Backorder costs
Total
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Aggregate Planning Example - 2
One person has retired.
Instead of replacing, use overtime
Reduced Regular output is 280
Maximum overtime output per period is 40 units

Develop a plan and compare it with previous plan

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 Aggregate Planning Example (2 of 3)
Period 1 2 3 4 5 6 Total
Forecast 200 200 300 400 500 200 1,800
Output
Regular time 280 280 280 280 280 280 11680
Overtime
Subcontract
Inventory
Output 2 Forecast
Inventory
Beginning
Ending
Average
Backlog

LO 11.5 11-23
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11-23
 Aggregate Planning Example - Costs (2 of 3)
Period 1 2 3 4 5 6 Total
Costs
Output
Regular
Overtime
Subcontracting
Inventory Costs
Backorder costs
Total

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 Summary of Mathematical Techniques

Technique Solution Approach Characteristics

Spreadsheet Heuristic (trial and Intuitively appealing, easy to understand;

error) solution not necessarily optimal

Linear programming Optimizing Computerized; linear assumptions not

always valid

Simulation Heuristic (trial

and error) Computerized model can be examined
under a variety of conditions

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Use of Aggregate Planning in Services

Hospitals:
Used to allocate funds, staff, and supplies to meet
the demands of patients

Airlines:
percentage of seats to be allocated to various fare
classes in order to maximize profit or yield

Restaurants:
smoothing the service rate, determining workforce
size

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11-28
Aggregate Planning in Services vs
Manufacturing
Similar, but there are some key differences:
1. Demand for service can be difficult to predict
2. Capacity availability can be difficult to predict
3. Labor flexibility can be an advantage in services
4. Services occur when they are rendered
5. No Inventory unlike manufacturing

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11-29