Aggregate Planning

@IMT, NAGPUR
 Lecture Outline

• Hierarchical Nature of Aggregate Planning

• Aggregate Planning Process
• Strategies for Adjusting Capacity
• Strategies for Managing Demand
• Quantitative Techniques for APP
Hierarchical Nature of Planning

Production Capacity Resource

Items Planning Planning Level
Product lines Aggregate Resource
production requirements Plants
or families
plan plan

Individual Master Rough-cut Critical

products production capacity work
schedule plan centers

Material Capacity All

Components requirements requirements work
plan plan centers

Manufacturing Shop Input/ Individual

operations floor output machines
schedule control
Aggregate Planning
• Collaborative procedure to match demand and capacity
• Translates business demand into marketing plans into
production plans for all product families
• Medium range plans (3 to 18 months)
• Within this time frame, it is usually
– not feasible to increase capacity by building new facilities
or purchase new equipments;
– however it is feasible to hire or lay off workers, increase or
reduce the workweek, add an extra shift, subcontract the
work, use overtime or flexi-time, build up or deplete the
inventory levels.
Aggregate Planning
• Also known a Sales and Operations Planning (SO&P)
• Determine the resource capacity needed to meet demand over
an intermediate time horizon
– Aggregate refers to product lines or families
– Resource capacity is exp’d in aggregate terms
– Labour hours, machine hours, space, time etc.
– Aggregate planning matches capacity and demand
• Objectives
– Establish a company wide game plan for allocating resources
– Develop an economic strategy for meeting demand
– The objective is to minimize the cost of resources required to
meet the demand over that period.
Strategies for Adjusting Capacity

• Peak Demand
• Inventory based
• Varying workforce levels
• Over-time and Under-time
• Subcontracting
• Part-time Workers
Strategies for Adjusting Demand

• Stimulating/Influencing demand
• Backordering during high demand period
• Counter seasonal products/services
Strategies for Adjusting Capacity

• Level Production
– Producing at a constant rate, usually at average demand
rate, and using inventory to absorb fluctuations in
demand.
– During periods of low demand, over-production is stored
as inventory
– Periods of high demand are taken care off through the
stored inventory
– Cost of this strategy is the cost of holding inventory,
including the cost of obsolete and perishable items
Level Production

Demand

Production
Units

Time
Strategies for Adjusting Capacity

• Chase Demand
– Matches the production plan to the demand pattern and
absorbs variation by hiring and firing workers
– During the periods of high demand workers are hired to
increase the production
– The cost of this strategy is hiring and firing the workers
– Cost effective during the periods of high unemployment
or for industries with low skill requirements
– Backfires in case of industries which needs higher level of
skills and where the labour is scarce and competition for
labour is intense
Chase Demand

Demand
Production
Units

Time
Mixed Strategy
• Combination of Level Production and Chase Demand
strategies
• Examples of management policies
– no more than x% of the workforce can be laid off in one quarter
– inventory levels cannot exceed x rupees
– production levels should not go down x levels of pre-specified
trade-offs between important factors
• Many industries may simply shut down manufacturing
during the low demand season and schedule employee
vacations during that time
Quantitative Techniques

• Pure Strategies
• Mixed Strategies
• Transportation Method
• Other Quantitative Techniques

• The most effective strategy depends on

• Demand distribution
• Competitive position
• Cost structure of the firm or product line
Pure Strategies

• ABC candy company makes a variety of candies in three

factories world wide. Its line of chocolate candies
exhibit a highly seasonal pattern, with peaks during the
winter months and troughs during the summers. Given
the following costs and quarterly sales forecasts,
determine whether [a] level production, or [b] chase
demand would more economical to meet the demand
for chocolate candies:
Pure Strategies
Example: QUARTER SALES FORECAST (KG)
I 80,000
II 50,000
III 120,000
IV 150,000

Hiring cost = Rs. 100 per worker

Firing cost = Rs. 500 per worker
Regular production cost per kg = Rs. 2.00
Inventory carrying cost = Rs. 0.50 per quarter
Production per employee = 1,000 kg. per quarter
Beginning work force = 100 workers
Level Production Strategy
Level production
(50,000 + 120,000 + 150,000 + 80,000)
= 100,000 KGS
4
SALES PRODUCTION
QUARTER FORECAST PLAN INVENTORY
I 80,000 100,000 20,000
II 50,000 100,000 70,000
III 120,000 100,000 50,000
IV 150,000 100,000 0
400,000 140,000
Cost of Level Production Strategy
(400000 X 2.00) + (140000 X 0.50) = Rs. 8,70,000
 Chase Demand Strategy
SALES PRODUCTION WORKERS WORKERS WORKERS
QUARTER FORECAST PLAN NEEDED HIRED FIRED

I 80,000 80,000 80 0 20
II 50,000 50,000 50 0 30
III 120,000 120,000 120 70 0
IV 150,000 150,000 150 30 0
100 50

Cost of Chase Demand Strategy

(400,000 X 2.00) + (100 x 100) + (50 x 500) = Rs. 8,35,000
 Transportation Method

EXPECTED REGULAR OVERTIME SUBCONTRACT

QUARTER 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 Rs. 20

Overtime production cost per unit Rs. 25
Subcontracting cost per unit Rs. 28
Inventory holding cost per unit per period Rs. 3
Beginning inventory 300 units
No backordering is permitted. Design a production plan that will
satisfy the demand at lowest possible cost.
    Period of Use Units   Unused

Period of Production 1 2 3 4 Produced Capacity Capacity

  Beg. Inventory 300 0

0 3
0 6 9
300

1 Regular 20 23 26 29
1,000

  Overtime 25 28 31 34
100

  Subk 28 31 34 37
500

2 Regular   20 23 26
1,200

  Overtime   25 28 31
150

  Subk   28 31 34
500

3 Regular     20 23
1,300

  Overtime     25 28
200

  Subk     28 31
500

4 Regular       20
1,300

  Overtime       25
200

  Subk       28
500
  Units Supplied 7,000

  Demand 900 1,500 1,600 3,000   7,000    

  Unmet Demand   Total Cost =
    Period of Use Units   Unused

Period of Production 1 2 3 4 Produced Capacity Capacity

  Beg. Inventory 300 0

0 3
0 6
0 9
300 300

1 Regular 600 20 23 26 29
1,000

  Overtime 25 28 31 34
100

  Subk 28 31 34 37
500

2 Regular   1200 20 23 26
1,200

  Overtime   25 28 31
150

  Subk   28 31 34
500

3 Regular     1300 20 23
1,300

  Overtime     25 28
200

  Subk     28 31
500

4 Regular       1300 20
1,300

  Overtime       25
200

  Subk       28
500
  Units Supplied   7,000

  Demand 900 1,500 1,600 3,000   7,000    

  Unmet Demand 0   0   0   0     Total Cost =
    Period of Use Units   Unused

Period of Production 1 2 3 4 Produced Capacity Capacity

  Beg. Inventory 300 0

0 3
0 6
0 9
300 300 0

1 Regular 600 20
300 23
100 26
0 29
1,000 1,000 0

  Overtime 0 25
0 28
0 31
100 34
100 100 0

  Subk 0 28
0 31
0 34
0 37
0 500 500

2 Regular 0   1200 20
0 23
0 26
1200 1,200 0

  Overtime 0   0 25
0 28
150 31
150 150 0

  Subk 0   0 28
0 31
250 34
250 500 250

3 Regular 0   0   1300 20
0 23
1,300 1,300 0

  Overtime 0   0   200 25
0 28
200 200 0

  Subk 0   0   0 28
500 31
500 500 0

4 Regular 0   0   0   1300 20
1,300 1,300 0

  Overtime 0   0   0   200 25
200 200 0

  Subk 0   0   0   500 28
500 500 0
  Units Supplied 900   1,500   1,600   3,000   7,000 7,000 750

  Demand 900 1,500 1,600 3,000   7,000    

  Unmet Demand 0   0   0   0     Total Cost = $153,550
 Production Plan
REGULAR SUB- ENDING
PERIOD DEMAND PRODUCTION OVERTIME CONTRACT INVENTORY

1 900 1000 100 0

500
(OS:3+2)

2 1500 1200 150 250

(5+1)600

3 1600 1300 200 500 (6+4) 1000

4 3000 1300 200 500
0
-------------------------------------------------------------------------
Total 7000 4800 650 1250
2100
 AP for Services

1. Most services can’t be inventoried

2. Demand for services is difficult to predict
3. Capacity is also difficult to predict
4. Service capacity must be provided at the
appropriate place and time
5. Labor is usually the most constraining
resource for services