Aggregate Planning

(Sales and operations planning)

भारतीय प्रबंधन संस्थान शिलांग

Indian Institute of Management Shillong
Aggregate planning
What does aggregate planning do?
How to respond the demand fluctuation?
How do organization define an aggregate plan?

भारतीय प्रबंधन संस्थान शिलांग

3 November
2022
Aggregate planning
Sales and Operations Planning (S&OP) is an aggregate planning
process that determines the resource capacity a firm will need
to meet its demand over an intermediate time horizon—6 to
12 months in the future.

The term ‘aggregate’ is used because the plans are developed

for product lines or product families, rather than individual
products.

भारतीय प्रबंधन संस्थान शिलांग

3 November
2022
Objective of aggregate Planning
The objectives of aggregate planning are—
✓ To establish a company-wide game plan for allocating resources
✓ To develop an economic strategy for meeting demand.
✓ To minimize cost over the planning period by adjusting
 Production rates
 Labor levels
 Inventory levels
 Overtime work
 Subcontracting rates
 Other controllable variables

भारतीय प्रबंधन संस्थान शिलांग

3 November
2022
Aggregate Planning Inputs
Resources/ capacity Costs/financial
constraints constraints
– Workforce
– Inventory carrying
– Facilities
– Back orders
Demand forecast
– Hiring/firing
Policy statements
– Subcontracting – Overtime
– Overtime – Inventory changes
– Inventory levels – subcontracting
– Back orders

Note: An economic strategy for meeting demand can be

attained by either adjusting capacity or managing demand.

भारतीय प्रबंधन संस्थान शिलांग

3 November
2022
Sales and operations planning

भारतीय प्रबंधन संस्थान शिलांग

3 November
2022
Monthly S&OP planning process

भारतीय प्रबंधन संस्थान शिलांग

3 November
2022
Strategies for adjusting capacity
Aggregate planning becomes more of a challenge when demand fluctuates
over the planning horizon.
For example, seasonal demand patterns can be met by:
1. Producing at a constant rate and using inventory to absorb fluctuations in
demand (level production)
2. Hiring and firing workers to match demand (chase demand)
3. Maintaining resources for high-demand levels
4. Increasing or decreasing working hours (overtime and undertime)
5. Subcontracting work to other firms
6. Using part-time workers
7. Providing the service or product at a later time period (backordering)

When one of these alternatives is selected, a company is said to have a pure

strategy for meeting demand.
When two or more are selected, a company has a mixed strategy.

भारतीय प्रबंधन संस्थान शिलांग

3 November
2022
Level production
The level production strategy means producing at a constant rate
and using inventory as needed to meet demand.

• During periods of low demand,

overproduction is stored as
inventory, to be depleted in periods
of high demand.
• The cost of this strategy is the cost
of holding inventory, including the
cost of obsolete or perishable items
that may have to be discarded.

भारतीय प्रबंधन संस्थान शिलांग

3 November
2022
Chase demand
The chase demand strategy means changing workforce levels so that
production matches demand.
Absorbs variations in demand by hiring and firing workers.
This approach would not work for industries in which worker skills are
scarce or competition for labor is intense, but it can be quite cost-
effective during periods of high unemployment or for industries
with low-skilled workers.

A variation of chase demand is chase

supply. For some industries, the
production planning task
revolves around the supply of raw
materials, not the demand pattern.

भारतीय प्रबंधन संस्थान शिलांग

3 November
2022
Peak demand
Maintaining resources for peak demand levels ensures high levels of
customer service but can be very costly in terms of the investment
in extra workers and machines that remain idle during low-demand
periods.
This strategy is used when superior customer service is important or
when customers are willing to pay extra for the availability of
critical staff or equipment.
Professional services trying to generate more demand may keep staff
levels high, defense contractors may be paid to keep extra capacity
“available,” and full-service hospitals may invest in specialized
equipment that is rarely used but is critical for the care of a small
number of patients.

भारतीय प्रबंधन संस्थान शिलांग

3 November
2022
Overtime and undertime
Overtime and undertime are common strategies when demand
fluctuations are not extreme.
Overtime
A competent staff is maintained, hiring and firing costs are avoided,
and demand is met temporarily without investing in permanent
resources.
Disadvantages include—
➢ The premium paid for overtime work,
➢ A tired and potentially less efficient workforce, and
➢ The possibility that overtime alone may be insufficient to meet
peak demand periods.

भारतीय प्रबंधन संस्थान शिलांग

3 November
2022
Continues…
Undertime can be achieved by working fewer hours during the day
or fewer days per week.
In addition, vacation time can be scheduled during months of slow
demand.
For example—
• Furniture manufacturers typically shut down the entire month of
July, while shipbuilding goes dormant in December.
• During the recession, 35% of U.S. employers surveyed used
unpaid furloughs in lieu of more layoffs to adjust to decreased
demand.
• Europe routinely uses shorter workweeks and mandatory
vacations in economic downturns.

भारतीय प्रबंधन संस्थान शिलांग

3 November
2022
Subcontracting
Subcontracting or outsourcing is a feasible alternative if a supplier
can reliably meet quality and time requirements.
This is a common solution for component parts when demand
exceeds expectations for the final product.
The subcontracting decision requires maintaining strong ties with
possible subcontractors and first-hand knowledge of their work.
Disadvantages of subcontracting include—
• Reduced profits,
• Loss of control over production,
• Long lead times, and
• The potential that the subcontractor may become a future
competitor.

भारतीय प्रबंधन संस्थान शिलांग

3 November
2022
Part-time workers
Using part-time workers is feasible for unskilled jobs or in areas with
large temporary labor pools (such as students, homemakers, or
retirees).
Part-time workers are less costly than full-time workers—they receive
no health-care or retirement benefits—and are more flexible—their
hours usually vary considerably.
Part-time workers have been the mainstay of retail, fast-food, and
other services for some time and are becoming more accepted in
manufacturing and government jobs.
Japanese manufacturers traditionally use a large percentage of part-
time or temporary workers.

भारतीय प्रबंधन संस्थान शिलांग

3 November
2022
Backlogs, backordering, and lost sales
Companies that offer customized products and services accept
customer orders and fill them at a later date.
Backlog: accumulated customer orders to be completed at a later
date.
➢It grows during periods of high demand and is depleted during
periods of low demand.
➢The planned backlog is an important part of the aggregate plan.
Backordering: ordering an item that is temporarily out-of-stock.
➢For make-to-stock companies, customers who request an item
that is temporarily out-of-stock may have the option of
backordering the item.
Lost sales: forfeited sales for out-of-stock items.
Note: Backorders are added to the next period’s requirements; lost
sales are not.

भारतीय प्रबंधन संस्थान शिलांग

3 November
2022
Strategies for managing demand
Strategies for managing demand include—
• Shifting demand into other time periods with incentives, sales promotions,
and advertising campaigns
➢ Examples: Winter coat specials in July and bathing-suit sales in January are attempts to
shift demand into different time periods.
• Offering products or services with countercyclical demand patterns
➢ This approach involves examining the idleness of resources and creating a demand for
those resources.
➢ McDonald’s offers breakfast to keep its kitchens busy during the prelunch hours, and
heating firms also sell air conditioners.
• Partnering with suppliers to reduce information distortion along the supply
chain
➢ To control the Bullwhip effect, manufacturers, their suppliers, and customers form
partnerships in which demand information is shared and orders are placed in a more
continuous fashion.

भारतीय प्रबंधन संस्थान शिलांग

3 November
2022
Quantitative techniques for aggregate
planning
One aggregate planning strategy is not always preferable to
another.
The most effective strategy depends on—
▪ The demand distribution,
▪ Competitive position, and
▪ Cost structure of a firm or product line.
The different quantitative techniques are—
➢ Pure and mixed strategies,
➢ Linear programming,
➢ Transportation method, and
➢ Some other quantitative techniques.

भारतीय प्रबंधन संस्थान शिलांग

3 November
2022
Pure strategies
Solving aggregate planning problems involves—
➢ Formulating strategies for meeting demand,
➢ Constructing production plans from those strategies,
➢ Determining the cost and feasibility of each plan, and
➢ Selecting the lowest cost plan from among the feasible alternatives.

The effectiveness of the aggregate planning process is directly

related to management’s understanding of the cost variables
involved and the reasonableness of the scenarios tested.

भारतीय प्रबंधन संस्थान शिलांग

3 November
2022
Aggregate planning using pure strategies
Example
The Good and Rich Candy Company makes a variety of candies in three factories
worldwide. Its line of chocolate candies exhibits a highly seasonal demand pattern,
with peaks during the winter months (for the holiday season and Valentine’s Day)
and valleys during the summer months (when chocolate tends to melt and
customers are watching their weight). Given the following costs and quarterly sales
forecasts, determine whether (a) level production, or (b) chase demand would more
economically meet the demand for chocolate candies:

QUARTER SALES FORECAST (LB)

Spring 80,000
Summer 50,000
Fall 120,000
Winter 150,000

भारतीय प्रबंधन संस्थान शिलांग

3 November
2022
Continues…
Solution Hiring cost = $100 per worker
Firing cost = $500 per worker
Inventory carrying cost = $0.50 pound per quarter
Production per employee = 1,000 pounds per quarter
Beginning work force = 100 workers

Level production

(50,000 + 120,000 + 150,000 + 80,000)

4

= 100,000 pounds

भारतीय प्रबंधन संस्थान शिलांग

3 November
2022
Continues…
Level Production Strategy

SALES PRODUCTION
QUARTER FORECAST PLAN INVENTORY
Spring 80,000 100,000 20,000
Summer 50,000 100,000 70,000
Fall 120,000 100,000 50,000
Winter 150,000 100,000 0
400,000 140,000

Cost = 140,000 pounds x 0.50 per pound = $70,000

भारतीय प्रबंधन संस्थान शिलांग

3 November
2022
Continues…
Chase Demand Strategy
SALES PRODUCTION WORKERS WORKERS WORKERS
QUARTER FORECAST PLAN NEEDED HIRED FIRED
Spring 80,000 80,000 80 0 20
Summer 50,000 50,000 50 0 30
Fall 120,000 120,000 120 70 0
Winter 150,000 150,000 150 30 0
100 50

Cost = (100 workers hired x $100) + (50 workers fired x $500)

= $10,000 + 25,000 = $35,000
Comparing the cost of level production with chase demand, we find that
chase demand is the best strategy for the Good and Rich line of
candies.

भारतीय प्रबंधन संस्थान शिलांग

3 November
2022
Mixed strategies
Varying two or more capacity factors to determine a feasible
production plan.
Mixed strategies can incorporate management policies, such as “no
more than x% of the workforce can be laid off in one quarter” or
“inventory levels cannot exceed x dollars.”

For example, many industries that experience a slowdown during

part of the year may simply shut down manufacturing during the
low-demand season and schedule employee vacations during that
time.

भारतीय प्रबंधन संस्थान शिलांग

3 November
2022
Linear programming Example
Minimize Z = $100 (H1 + H2 + H3 + H4)
+ $500 (F1 + F2 + F3 + F4)
+ $0.50 (I1 + I2 + I3 + I4)
Subject to
P1 - I1 = 80,000 (1)
Demand I1 + P2 - I2 = 50,000 (2)
constraints I2 + P3 - I3 = 120,000 (3)
I3 + P4 - I4 = 150,000 (4)
where
Production 1000 W1 = P1 (5)
Ht = # hired for period t
constraints 1000 W2 = P2 (6) Ft = # fired for period t
1000 W3 = P3 (7) It = inventory at end
of period t
1000 W4 = P4 (8) Pt = units produced
100 + H1 - F1 = W1 (9) in period t
Work force W1 + H2 - F2 = W2 (10) Wt = workforce size
for period t
constraints W2 + H3 - F3 = W3 (11)
W3 + H4 - F4 = W4 (12)

भारतीय प्रबंधन संस्थान शिलांग

3 November
2022
The transportation method
For cases in which the decision to change the size of the
workforce has already been made or is prohibited, the
transportation method of linear programming can be used to
develop an aggregate production plan.
The transportation method gathers all the cost information into
one matrix and plans production based on the lowest-cost
alternatives.

भारतीय प्रबंधन संस्थान शिलांग

3 November
2022
Continues…

भारतीय प्रबंधन संस्थान शिलांग

3 November
2022
Continues…
Burruss Manufacturing Company uses overtime, inventory, and subcontracting to
absorb fluctuations in demand. An aggregate production plan is devised annually
and updated quarterly. Cost data, expected demand, and available capacities in
units for the next four quarters are given here. Demand must be satisfied in the
period it occurs; that is, no backordering is allowed. Design a production plan that
will satisfy demand at minimum cost.

Quarter Expected Regular Overtime Subcontract

demand capacity capacity capacity
1 900 1000 100 500

2 1500 1200 150 500

3 1600 1300 200 500

4 3000 1300 200 500

Regular production cost per unit =$20; Overtime production cost per unit =$25
Subcontracting cost per unit =$28; Inventory holding cost per unit per period= $ 3
Beginning inventory 300 units

भारतीय प्रबंधन संस्थान शिलांग

3 November
2022
Continues…

भारतीय प्रबंधन संस्थान शिलांग

3 November
2022
Continues…

भारतीय प्रबंधन संस्थान शिलांग

3 November
2022
Other quantitative techniques
Linear decision rule
➢ It is an optimizing technique originally developed for aggregate planning in a paint
factory.
➢ It solves a set of four quadratic equations that describe the major capacity-related
costs in the factory:
✓ payroll costs,
✓ hiring and firing,
✓ overtime and undertime, and
✓ inventory costs.
➢ The results yield the optimal workforce level and production rate.
Search decision rule
➢ It is a pattern search technique for aggregate planning.
➢ Tries to find the minimum cost combination of various workforce levels and
production rates.
Management coefficients model
➢ A regression techniques for aggregate planning

भारतीय प्रबंधन संस्थान शिलांग

3 November
2022
The hierarchical nature of planning

भारतीय प्रबंधन संस्थान शिलांग

3 November
2022
Collaborative planning
Collaborative planning is part of the supply chain process of
collaborative planning, forecasting, and replenishment (CPFR)
CPFR involves selecting the products to be jointly managed,
creating a single forecast of customer demand, and synchronizing
production across the supply chain.
Consensus among partners is reached first on the sales forecast,
then on the production plan.
One example of an event that requires collaboration among trading
partners is quoting available to- promise dates for customers.

भारतीय प्रबंधन संस्थान शिलांग

3 November
2022
Available-to-promise (ATP)
In the current business environment of outsourcing and build-to-
order products, companies must be able to provide the customer
with accurate promise dates.
As customer orders come in consuming the forecast, the remaining
quantities are available-to-promise to future customers.
Available-to-promise is the difference between customer orders (CO)
and planned production.
ATP may also involve drilling down beyond the end item level to
check the availability of critical components.

ATP in period 1 = (On-hand quantity + MPS in period 1) – (CO until the next period of planned production)

ATP in period n = (MPS in period n) – (CO until the next period of planned production)

भारतीय प्रबंधन संस्थान शिलांग

3 November
2022
Available-to-promise (ATP) Example
East Coast Bicycle Company has recently begun to accept customer orders over the
Internet. The company uses both an aggregate production plan for families and a
master production schedule for individual products. Now East Coast wants to add
available-to-promise functionality to the planning process. Using the information
given below, determine how many girls 26" bikes are available-to-promise in
April, May, and June.

भारतीय प्रबंधन संस्थान शिलांग

3 November
2022
Continues…
Solution

भारतीय प्रबंधन संस्थान शिलांग

3 November
2022
Rules-Based ATP

भारतीय प्रबंधन संस्थान शिलांग

3 November
2022
Thank You

भारतीय प्रबंधन संस्थान शिलांग

3 November
2022