Aggregate Planning

Phases of Decisions
 Strategyor design: Forecast
 Planning: Forecast
 Operation Actual demand

 Since actual demands differs from forecasts so does the execution

from the plans.

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Costs affected by Aggregate Planning
 Hiring Costs
 Layoff Costs
 Overtime Costs
 Inventory carrying Costs
 Shortage Costs (Backorders)
 Subcontracting Costs

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Aggregate Planning Inputs
 Resources
– Workforce
– Facilities
 Demand Forecast
 Policies
– Subcontracting
– Overtime
– Inventory levels
– Backorders
 Costs
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Content of the Production Plan - MTO

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Content of the Production Plan - MTS

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Characteristics of forecasts
 Forecasts are always wrong. Should include expected value and measure of error.
 Long-term forecasts are less accurate than short-term forecasts. Too long term
forecasts are useless: Forecast horizon
 Aggregate forecasts are more accurate than disaggregate forecasts
– Variance of aggregate is smaller because extremes cancel out
» Two samples: {3,5} and {2,6}. Averages of samples: 4 and 4.
» Variance of sample averages=0
» Variance of {3,5,2,6}
 Several ways to aggregate
– Products into product groups
– Demand by location
– Demand by time

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 Overview of Planning Levels

 Short-range plans (Detailed plans)

– Machine loading
– Job assignments
 Intermediate plans (General levels)
– Employment
– Output
 Long-range plans
– Long term capacity
– Location / layout
– Product/Process design
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 Planning Horizon
Aggregate planning: Aggregate planning is a method for analyzing,
developing and maintaining a manufacturing plan with an emphasis
on uninterrupted, consistent production. Aggregate planning is most
often focused on targeted sales forecasts, inventory management
and production levels in the mid-term (3-to-18-month) future.
Long range

Intermediate
range
Short
range

Now 3 months 18 months

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 Planning Horizon
Aggregate planning: Intermediate-range capacity planning, usually
covering 3 to 18 months. In other words, it is matching the capacity
and the demand.

Long range

Intermediate
range
Short
range

Now 3 months 18 months

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 Types of Aggregate Planning

 Chase Strategy (Matching demand): The production matches demand, and

excess inventory isn’t held over. This is part of a larger lean production
strategy, which saves money by waiting until an order is placed. However, it
can negatively impact the morale of the workforce.
 Level Strategy: The goal of an aggregate planning strategy is to keep the
production rate and the workforce level. This aggregate production planning
strategy will keep the workforce steady but can increase inventory and
backlog.
 Hybrid Strategy: There is a third alternative, which is a hybrid of the
previous two strategies. This keeps the balance between the production rate,
workforce and inventory levels, while still responding to demand as it
changes.

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Case Example – Chase Strategy

• Product Mix: 3 types of

Paints
• Working days per Quarter:
65
• Labour standard: 2.311
worker-hours per gallons per
shift
• 8 hours per shift per worker
• Max. Machine capacity:
100000 gallons per quarter
for all types of paints
Case Example – Chase Strategy

• Product Mix: 3 types of

Paints
• Working days per Quarter:
65
• Labour standard: 2.311
worker-hours per gallons per
shift
• 8 hours per shift per worker
• Max. Machine capacity:
100000 gallons per quarter
for all types of paints
Case Example – Chase Strategy
Case Example – Level Strategy

• Production capacity is held

constant
• Difference between
production and demand is
made-up with Inventory,
Backlog, Overtime, Part-
time, temporary workforce or
sub-contracting
Case Example – Level Strategy

• Buffering with Inventory

• Produce-to-stock firms

EI t  EI t 1  ( Pt  Dt )
Case Example – Level Strategy
Case Example – Level Strategy

• Buffering with Back-log

• Produce-to-order firms

EBLt  EBLt 1  ( Dt  Pt )
Case Example – Level Strategy
Aggregate Quarter Aggregate Planned Workers Inventory BI EI AI Annual AI
Plan demand Output reqd.

Level
Capacity
with
Inventory
Matching
demand
Aggregate Quarter Aggregate Total Total Annual AI Annual Annual AICC Total
Plan demand Annual Annual Hiring layoff cost Increment
number number cost al
of of Operating
workers workers cost
hired fired

Level
Capacity
with
Inventory
Matching
demand