Operations and Supply Chain Management

Aggregate Planning

Prof. Svenja Sommer

sommers@hec.fr

Supply Chain Decision Hierarchy

Purchasing
Long
Term
(years)

Production

System Structure, Products and Process Design

Vendor Panel

Plants

Middle
Term
(months)

Sales and Operations Plan

Short
Term
(weeks)

MRP

Execution
(days)

Distribution

Contracts

Procurement
Calls for delivery
Transport/Receipt

Capacity Adjustment

Distribution Network

Inventories

Sales
Long-term Forecast
Distribution Channels
Mid-term Forecast
Family items

MPS MRP

DRP

Inventory

Inventory

Short-term Forecast
Cust. Orders - ATP

Scheduling
Activity control

Order Preparation
Shipping/Transport

Invoicing
Field service

Aggregate Planning
Aggregate Plan:

Medium term plan (typically 6-12 months)

Manufacturing firm : Production plan

Service firm : Staffing plan

Objective:
Match capacity and demand over the next few months on an aggregate level

Outcome:
Production levels and resource requirements for one or few product families
using similar resources (labor, equipment)

Relationship to Sales and Operations Planning

An Aggregate Plan is just one part of the SOP
Marketing Plan: Sales, prices, new product introductions, etc.
Financial Plan: Revenues, expenses, debt, etc.
Personnel Plan: Workforce levels, training, transitions, etc.
Procurement Plan: Levels of material needed, supplier contracts

These plans need to be coordinated:

Aggregate plan interacts with all of these plans
Aggregate Planning is a Subroutine in this larger process
ERP systems (like SAP) help facilitate this coordination
4

Aggregate Planning Goals

Meet demand
Use capacity efficiently
Meet inventory policy
Minimize costs:
Labor
Inventory
Plant and Equipment
Subcontracting

Inputs for Aggregate Planning

A reasonably accurate forecast
(as discussed last class)

Definition of a single overall measure of output and

sales (aggregate unit)
Define one model as the base model
Define hypothetical model based on average number
of units / hour
Capacity measured in the same aggregate unit!
(remember definition of flow unit in ScharffenBerger!)

Various costs and constraints

(see next slides)

6

Characteristics of costs involved

Cost of Capacity:
Regular time costs:
Usually monotonic increasing function
Large part linked to regular-time wage paid to
workers

Overtime costs:
Function nonlinear and can increase very sharply as
production rate increases

Costs related to production rate change:

Changes in size of work force (hiring and firing)
Shutdown, startup

Characteristics of costs involved

Inventory associated costs:
Tying up funds
Holding costs

Costs of insufficient capacity in short term

Shortage costs
Inventory costs

Control system costs

Data acquisition
Computational effort
Implementation

Personnel constraints
Maximum allowed overtime hours
New staff costs
Finding skilled workers
Training
Productivity

Legal Constraints
For firing
Temporary contract

Spread working hours over the year

9

Inputs for Aggregate Planning

A reasonably accurate forecast
(as discussed last class)

Definition of a single overall measure of output and

sales (aggregate unit)
Define one model as the base model
Define hypothetical model based on average number
of units / hour
Capacity measured in the same aggregate unit!
(remember definition of flow unit in ScharffenBerger!)

Various costs and constraints

(see next slides)

10

Calculating aggregate demand

How much time do we need to meet demand for each product?
How many standard units can we make in the same time?
time [Hrs. /unit]

Demand

AA

2.0

2000

2.0 * 2000 / 2.0 = 2000

BB

3.0

1000

3.0 * 1000 / 2.0 = 1500

CC
DD

1.5
1.0

2400
1200

1.5 * 2400 / 2.0 = 1800

1.0 * 1200 / 2.0 = 600

Aggregate requirement
E
D

rate [unit/hour]
200
160

60

Demand
3000
880

120
Aggregate requirement

Demand in standard units

5900
Demand in standard units
(3000 / 200) * 160 = 2400
(880 / 160) * 160 = 880
(120 / 60) * 160 = 320
3600

If these are versions of the same product, you often directly forecast the aggregate
demand.

11

Two Generic or Pure Strategies

for Aggregate Planning
Chase Strategy:
Production quantity equals aggregate demand for each period.

Level Strategy:
Production quantity equals the average demand over the planning
horizon.
Demand, Output

Aggregate
demand
Chase
Level
12

Basic plan based on pure strategies

Period

January

Aggr.
Demand

5000

Chase
Strategy
Level
Strategy

February

March

April

6000

8500

4500

5000

6000

8500

4500

6000

6000

6000

6000

Level Strategy:
Average = (5000+6000+8500+4500)/4 = 6000

Make adjustments based on constraints

13

Example of adjustments: Capacity constraint

Chase Strategy
Period
Capacity

1
2
8000 8000

3
4
8000 8000

Demand

5000 6000

8500 4500

Basic Plan

5000 6000

8500 4500

End Inventory

Adjusted Plan 5000 6500

End Inventory
Solution:

500

8000 4500
0

Whats the problem

with the basic plan?
Capacity exceeded in P3.
What could we do?
Shift 500 units to P1.
Shift 500 units to P2.
Shift 500 units to P4.
A combination?

Shift 500 units to P2.

Produce close to desirable period. Why?

Example of adjustments: Shortages

Level Strategy

Inv. for period X = Inv. for (X-1) + Production for X - Demand for X
Period

Capacity

8000 8000

8000 8000

Whats the problem with

the basic plan?

Demand

5000 6000

8500 4500

Shortage of 1500 in P3.

Basic plan
Inventory
Adj. plan
Inventory

6000 6000 Solution:

Increase production by 500
0
1000
1000
-1500
0
in P1, P2 and P3
6500 6500 6500 4500 and reduce P4 by 1500.
Produce as LEVEL as
1500
2000
0
0
0
possible.
6000 6000

Advantages of
Chase Strategy

Level Strategy

Lower inventory build up

Constant production rate

Low holding costs

High resource utilization

Low risk of obsolescence

Lower capacity required

Less backorders / stockouts

More flexible
Respond to changes in demand
Applicable to service industry

Stable workforce levels

Low hiring / firing costs
Motivation/ union relations
Quality
No need for subcontracting
Quality

Comparison of Aggregate
Planning Methods
Feasible solution methods
Trial and error starting from basic plan.
Simple to understand; easy to use. Solution may not be optimal

Mathematical Methods
Cost optimization possible
LP software available, permits rich analysis, assumes linearity of
problem.

Simulation
Realistic assumptions and modeling, permits scenarios
Varying factors
Does not guarantee optimal solution; time consuming
17

If you face seasonal demand:

Product Portfolio

Look for products with inverted seasonality

Product A

Product B

Why is subcontracting during peak demand

probably not a solution ?
18

Which items to keep in stock?

Building an anticipation inventory in order to
move working load hours
Build this inventory while creating the lowest
Working capital requirement
Item
A
B
C

Cost
120
200
60

Hours
3
8
2

With which item should this inventory be built considering cost only?
Why might you want to build a more balanced mix of inventory?
19

Aggregate plan update

Monitor the discrepancies between forecasts
and order entry
Planned updates
Quarterly or every semester
Plan the end of year

Exceptional updates
Major changes in demand

20

Example: Courtine
example demonstrating other factors to
consider in the plan
& how the plan can be broken down to
individual products (as input to MRP systems)

Next Class
Purchasing
Long
Term
(years)

Production

System Structure, Products and Process Design

Vendor Panel

Plants

Middle
Term
(months)

Sales and Operations Plan

Short
Term
(weeks)

MRP

Execution
(days)

Distribution

Contracts

Procurement
Calls for delivery
Transport/Receipt

Capacity Adjustment

Distribution Network

Inventories

Sales
Long-term Forecast
Distribution Channels
Mid-term Forecast
Family items

MPS MRP

DRP

Inventory

Inventory

Short-term Forecast
Cust. Orders - ATP

Scheduling
Activity control

Order Preparation
Shipping/Transport

Invoicing
Field service

22