Operations Management: William J. Stevenson

12-1 Aggregate Planning
Operations Management
William J. Stevenson
8th edition
Aggregate
Planning
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
Planning Horizon
Aggregate planning: Intermediate-range

capacity planning, usually covering 2 to 12
months.
Long range
Intermediate
range
Short
range
Now 2 months 1 Year

Aggregate Planning
 Determine the resource capacity needed to meet demand
over an intermediate time horizon
 Aggregate refers to product lines or families
 Aggregate planning matches supply and demand
 Objectives
 Establish a company wide game plan for allocating
resources
 Develop an economic strategy for meeting demand
Aggregate Planning Process

Aggregate Planning Inputs
 Resources  Costs
 Workforce  Inventory carrying
 Facilities  Back orders
 Demand forecast  Hiring/firing
 Policies  Overtime
 Inventory changes
 Subcontracting
 Overtime  subcontracting
 Inventory levels
 Back orders
Aggregate Planning Outputs
 Total cost of a plan

 Projected levels of inventory
 Inventory
 Output
 Employment
 Subcontracting
 Backordering
Aggregate Planning Strategies
 Proactive
 Alter demand to match capacity
 Reactive
 Alter capacity to match demand
 Mixed
 Some of each
Demand Options
 Pricing
 Promotion
 Back orders
 New demand
Capacity Options
 Hire and layoff workers

 Overtime/slack time
 Part-time workers
 Inventories
 Subcontracting
Strategies for Adjusting Capacity

 Level production  Overtime and under-time
 Producing at a constant rate  Increasing or decreasing
and using inventory to working hours
absorb fluctuations in  Subcontracting
demand  Let outside companies
 Chase demand complete the work
 Hiring and firing workers to  Part-time workers
match demand  Hiring part time workers to
 Peak demand complete the work
 Maintaining resources for  Backordering
high-demand levels  Providing the service or
product at a later time
period
Basic Strategies
 Chase demand strategy:

 Matching capacity to demand; the planned
output for a period is set at the expected
demand for that period.
 May involve laying off and hiring workers.
Chase Demand
Demand
Production
Units
Time
Chase Approach
 Advantages
 Investment in inventory is low
 Labor utilization in high
 Disadvantages
 The cost of adjusting output rates and/or
workforce levels
Basic Strategies
 Level capacity strategy:
 Maintaining a steady rate of regular-time output
while meeting variations in demand by a
combination of options.
 Shortages and surpluses are absorbed by fluctuating
inventory levels.
 Employees benefit from stable work hours, but
inventory costs are increased.
Level Production
Demand
Production
Units
Time
Level Approach
 Advantages
 Stable output rates and workforce
 Disadvantages
 Greater inventory costs
 Increased overtime and idle time
 Resource utilizations vary over time
Basic Strategies
 Stable Workforce-Variable Hours strategy:
 Vary the output by varying the number of hours
worked through flexible work schedules or
overtime.
 Production quantities can be matched to existing
orders.
 Provides workforce continuity without having to lay
off and hire workers.
Techniques for Aggregate Planning
1. Determine demand for each period

2. Determine capacities for each period
3. Identify policies that are pertinent
4. Determine units costs
5. Develop alternative plans and costs
6. Select the best plan that satisfies objectives.
Otherwise return to step 5.
Average Inventory
Average Beginning Inventory + Ending Invento

=
inventory 2
Example 1
Planners for a company that makes several models of tractors are
about to prepare the aggregate plan that will cover six periods.
The following information is obtained:
Period 1 2 3 4 5 6 Total
Forecast 200 200 300 400 500 200 1,800
Costs:
Output: Regular time =$2 per tractor
Overtime =$3 per tractor
Subcontract =$6 per tractor
Inventory =$1 per tractor per period on average inventory.
Back orders = $5 per tractor per period.
Example 1
Use level strategy to prepare for an aggregate plan
and determine the total cost. Assume a level
output rate of 300 units (tractors) per period with
regular time. The planned ending inventory is
zero. There are 15 workers.
Example 1-Solution
Period 1 2 3 4 5 6 TOTAL
Forecast
OUTPUT
Regular
Overtime
Subcontract
Output-Forecast
INVENTORY
Beginning
Ending
Average
Backlog
COSTS
Regular
Overtime
Subcontract
Hire/Layoff
Inventory
Backorders
TOTAL
Example 1-Solution
Forecast 200 200 300 400 500 200 1,800
OUTPUT
Regular
Overtime
Subcontract
Output-Forecast
INVENTORY
Beginning
Ending
Average
Backlog
COSTS
Regular
Overtime
Subcontract
Hire/Layoff
Inventory
Backorders
TOTAL
Example 1-Solution
Forecast 200 200 300 400 500 200 1,800
OUTPUT
Regular 300 300 300 300 300 300 1,800
Overtime
Subcontract
Output-Forecast
INVENTORY
Beginning
Ending
Average
Backlog
COSTS
Regular
Overtime
Subcontract
Hire/Layoff
Inventory
Backorders
TOTAL
Example 1-Solution
Forecast 200 200 300 400 500 200 1,800
OUTPUT
Regular 300 300 300 300 300 300 1,800
Overtime
Subcontract
Output-Forecast 100 100 0 (100) (200) 100 0
INVENTORY
Beginning
Ending
Average
Backlog
COSTS
Regular
Overtime
Subcontract
Hire/Layoff
Inventory
Backorders
TOTAL
Example 1-Solution
Forecast 200 200 300 400 500 200 1,800
OUTPUT
Regular 300 300 300 300 300 300 1,800
Overtime
Subcontract
Output-Forecast 100 100 0 (100) (200) 100 0
INVENTORY
Beginning 0
Ending 100
Average 50
Backlog 0
COSTS
Regular
Overtime
Subcontract
Hire/Layoff
Inventory
Backorders
TOTAL
Example 1-Solution
Forecast 200 200 300 400 500 200 1,800
OUTPUT
Regular 300 300 300 300 300 300 1,800
Overtime
Subcontract
Output-Forecast 100 100 0 (100) (200) 100 0
INVENTORY
Beginning 0 100
Ending 100 200
Average 50 150
Backlog 0 0
COSTS
Regular
Overtime
Subcontract
Hire/Layoff
Inventory
Backorders
TOTAL
Example 1-Solution
Forecast 200 200 300 400 500 200 1,800
OUTPUT
Regular 300 300 300 300 300 300 1,800
Overtime
Subcontract
Output-Forecast 100 100 0 (100) (200) 100
INVENTORY
Beginning 0 100 200 200 100 0
Ending 100 200 200 100 0 0
Average 50 150 200 150 50 0
Backlog 0 0 0 0 100 0
COSTS
Regular
Overtime
Subcontract
Hire/Layoff
Inventory
Backorders
TOTAL
Example 1-Solution
Forecast 200 200 300 400 500 200 1,800
OUTPUT
Regular 300 300 300 300 300 300 1,800
Overtime
Subcontract
Output-Forecast 100 100 0 (100) (200) 100
INVENTORY
Beginning 0 100 200 200 100 0
Ending 100 200 200 100 0 0
Average 50 150 200 150 50 0
Backlog 0 0 0 0 100 0
COSTS ($)
Regular 600 600 600 600 600 600 3600
Overtime
Subcontract
Hire/Layoff
Inventory
Backorders
TOTAL
Example 1-Solution
Forecast 200 200 300 400 500 200 1,800
OUTPUT
Regular 300 300 300 300 300 300 1,800
Overtime
Subcontract
Output-Forecast 100 100 0 (100) (200) 100
INVENTORY
Beginning 0 100 200 200 100 0
Ending 100 200 200 100 0 0
Average 50 150 200 150 50 0
Backlog 0 0 0 0 100 0
COSTS ($)
Regular 600 600 600 600 600 600 3600
Overtime
Subcontract
Hire/Layoff
Inventory 50 150 200 150 50 0 600
Backorders
TOTAL
Example 1-Solution
Forecast 200 200 300 400 500 200 1,800
OUTPUT
Regular 300 300 300 300 300 300 1,800
Overtime
Subcontract
Output-Forecast 100 100 0 (100) (200) 100
INVENTORY
Beginning 0 100 200 200 100 0
Ending 100 200 200 100 0 0
Average 50 150 200 150 50 0
Backlog 0 0 0 0 100 0
COSTS ($)
Regular 600 600 600 600 600 600 3600
Overtime
Subcontract
Hire/Layoff
Inventory 50 150 200 150 50 0 600
Backorders 0 0 0 0 500 0 500
TOTAL
Example 1-Solution
Forecast 200 200 300 400 500 200 1,800
OUTPUT
Regular 300 300 300 300 300 300 1,800
Overtime
Subcontract
Output-Forecast 100 100 0 (100) (200) 100
INVENTORY
Beginning 0 100 200 200 100 0
Ending 100 200 200 100 0 0
Average 50 150 200 150 50 0
Backlog 0 0 0 0 100 0
COSTS ($)
Regular 600 600 600 600 600 600 3,600
Overtime
Subcontract
Hire/Layoff
Inventory 50 150 200 150 50 0 600
Backorders 0 0 0 0 500 0 500
TOTAL 650 750 800 750 1,150 600 4,700
Example 2
After reviewing the plan developed in the previous
example, planners have decided to develop an
alternative plan. They have learned that one
person is about to retire from the company.
Rather than replace that person, they would like
to stay with the smaller workforce and use
overtime to make up for the lost output. The
reduced regular-time output per period is 280
units. The maximum amount of overtime output
per period is 40 units. Hint: Schedule the
overtime beginning from period 3.
Example 2-Solution
Forecast 200 200 300 400 500 200 1,800
OUTPUT
Regular 280 280 280 280 280 280 1,680
Overtime
Subcontract
Output-Forecast
INVENTORY
Beginning
Ending
Average
Backlog
COSTS ($)
Regular
Overtime
Subcontract
Hire/Layoff
Inventory
Backorders
TOTAL
Example 2-Solution
Forecast 200 200 300 400 500 200 1,800
OUTPUT
Regular 280 280 280 280 280 280 1,680
Overtime 40 40 40 120
Subcontract
Output-Forecast
INVENTORY
Beginning
Ending
Average
Backlog
COSTS ($)
Regular
Overtime
Subcontract
Hire/Layoff
Inventory
Backorders
TOTAL
Example 2-Solution
Forecast 200 200 300 400 500 200 1,800
OUTPUT
Regular 280 280 280 280 280 280 1,680
Overtime 40 40 40 120
Subcontract
Output-Forecast 80 80 20 (80) (180) 80
INVENTORY
Beginning 0 80 160 180 100 0
Ending 80 160 180 100 0 0
Average 40 120 170 140 50 0 520
Backlog 0 0 0 0 80 0 80
COSTS ($)
Regular 560 560 560 560 560 560 3,360
Overtime 120 120 120 360
Subcontract
Hire/Layoff
Inventory 40 120 170 140 50 0 520
Backorders 0 0 0 0 400 0 400
TOTAL 600 680 850 820 1,130 560 4,640
Example 3
A third option is to use temporary workers to fill in
during months of high demand. Suppose that a
temporary worker can produce at the rate of 15
units per period, and it costs an additional $100
to hire and train a temporary worker.
a) Find out how many temporary workers are
needed
b) If the temporary workers are to work in only
periods 4 and 5, find out the total cost of this
option.
Example 3-Solution
Forecast 200 200 300 400 500 200 1,800
OUTPUT
Regular 280 280 280 340 340 280 1,800
Overtime
Subcontract
Output-Forecast
INVENTORY
Beginning
Ending
Average
Backlog
COSTS ($)
Regular
Overtime
Subcontract
Hire/Layoff
Inventory
Backorders
TOTAL
Example 3-Solution
Forecast 200 200 300 400 500 200 1,800
OUTPUT
Regular 280 280 280 340 340 280 1,800
Overtime
Subcontract
Output-Forecast 80 80 (20) (60) (160) 80
INVENTORY
Beginning 0 80 160 140 80 0
Ending 80 160 140 80 0 0
Average 40 120 150 110 40 0 460
Backlog 0 0 0 0 80 0 80
COSTS ($)
Regular 560 560 560 680 680 560 3,600
Overtime
Subcontract
Hire/Layoff 0 0 0 400 400 0 800
Inventory 40 120 150 110 40 0 460
Backorders 0 0 0 0 400 0 400
TOTAL 600 680 710 1,190 1,520 560 5,260
Aggregate Plan
QUARTER SALES FORECAST (LB)
Spring 80,000
Summer 50,000
Fall 120,000
Winter 150,000
Hiring cost = $100 per worker
Firing cost = $500 per worker
Regular production cost per pound = $2.00
Inventory carrying cost = $0.50 pound per quarter
Production per employee = 1,000 pounds per quarter
Beginning work force = 100 workers
Find the total cost of an aggregate plan using:
a) Level strategy
b) Chase strategy, with hiring and firing.
Aggregate Plan to Master Schedule

Figure 12.4
Aggregate
Planning
Disaggregation
Master
Schedule
Disaggregation
 Involves breaking down the plan into specific
product requirements to put production plan into
operation
 This includes determination of labour, materials,
and inventory requirements
 Rough-cut capacity planning is done to test the
feasibility of proposed requirements relative to
available capacities—facilities, labour, vendors,
etc
Disaggregation
Aggregate Jan Feb March

Plan
200 300 400
Jan Feb March

Model A 100 100 100
Disaggregated
Into
Model B 75 150 200
Model C 25 50 100
TOTAL 200 300 400
Disaggregating the Aggregate Plan
 Master schedule: The result of disaggregating

an aggregate plan; shows quantity and timing
of specific end items for a scheduled horizon.
 Rough-cut capacity planning: Approximate
balancing of capacity and demand to test the
feasibility of a master schedule.
Master Scheduling
 Master schedule
 Determines quantities needed to meet demand
 Interfaces with
 Marketing
 Capacity planning
 Production planning
 Distribution planning
Master Scheduler
 Evaluates impact of new orders

 Provides delivery dates for orders
 Deals with problems

 Production delays
 Revising master schedule
 Insufficient capacity
Master Scheduling Process

Figure 12.6
Inputs Outputs
Beginning inventory Projected inventory
Master
Forecast Master production schedule
Scheduling
Customer orders Uncommitted inventory

Projected On-hand Inventory
Projected on-hand Inventory from Current week’s

inventory
=
previous week
- requirements
Example 1
A company that makes industrial pumps wants to
prepare a master production schedule for June and
July. Forecast demands are 120 pumps for June
and 160 pumps for July. (30 pumps/week in June
and 40 pumps/week in July). Beginning inventory
is 64 pumps and there are customer orders that
have been committed as shown in the table.
Determine the projected on-hand inventory, the
MPS, and the uncommitted inventory (available-
to-promise, ATP). Production lot-size is 70
pumps.
Example 1
Beginning inventory is 64
Month June July

Week 1 2 3 4 5 6 7 8
Forecast 30 30 30 30 40 40 40 40
Orders 33 20 10 4 2
Projected On-hand Inventory

Figure 12.8
Beginning
Inventory
JUNE JULY
64 1 2 3 4 5 6 7 8
Forecast 30 30 30 30 40 40 40 40
Customer Orders
(committed) 33 20 10 4 2
Projected on-hand
inventory 31 1 -29 Forecast is larger than
Customer orders in week 3
Customer orders are Forecast is larger than

larger than forecast in Customer orders in week 2
week 1
Example 1
Week Inventory from Requirements Net inventory MPS Projected
previous week * before MPS (70) Inventory
(A) (B) (C=A-B) (MPS+C)
1 64 33 31 - 31
2
3
4
5
6
7
8
*Requirements equal the larger of forecast and customer orders in each week
Example 1
(A) (B) (C=A-B) (MPS+C)
1 64 33 31 - 31
2 31 30 1 - 1
3
4
5
6
7
8
Example 1
(A) (B) (C=A-B) (MPS+C)
1 64 33 31 - 31
2 31 30 1 - 1
3 1 30 -29 70 41
4
5
6
7
8
Example 1
(A) (B) (C=A-B) (MPS+C)
1 64 33 31 - 31
2 31 30 1 - 1
3 1 30 -29 70 41
4 41 30 11 - 11
5 11 40 -29 70 41
6 41 40 1 - 1
7 1 40 -39 70 31
8 31 40 -9 70 61
Available-to-Promise (ATP)
 Quantity of items that can be promised to the
customer
 Difference between planned production and
customer orders already received
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)
Example 1
Month June July
Week 1 2 3 4 5 6 7 8
Forecast 30 30 30 30 40 40 40 40
Orders 33 20 10 4 2
On-hand 31 1 41 11 41 1 31 61
inventory
MPS 70 70 70 70
ATP 11 56 68 70 70
Example 1
Month June July

Week 1 2 3 4 5 6 7 8
Forecast 30 30 30 30 40 40 40 40
Orders 33 20 10 4 2
On-hand 31 1 41 11 41 1 31 61
inventory
MPS 70 70 70 70
ATP 11 56 68 70 70
Example 2
A firm has 43 units of a certain product on hand.
Forecasts for the first two planning periods are
20 units each. A production quantity of 80 units
is planned to be available in period 3. Customer
orders are 22 for period 1 and 17 for period 2.
a) What is the projected on hand inventory at the
end of period 2?
b) What quantity is available for commitment to
new customers in period 1?
Example 2
Week 1 2 3
Forecast 20 20 -
Orders 22 17 -
On-hand 21 1 81
inventory
MPS 80
ATP 4 81
Example 3
A firm has 56 units of product X on hand. Forecasts
of demand are 20 units per week. An MPS
quantity of 100 units is planned for week 3.
Customer orders are 24 for week 1, 18 for week
2 and 15 for week 3.
a) What is the projected on-hand inventory at the
end of week 2?
b) What quantity is available for commitment to
new customers prior to the receipt of the MPS
quantity in week 3?
Example 3
Week 1 2 3
Forecast 20 20 20
Orders 24 18 15
On-hand 32 12 92
inventory
MPS 100
ATP 14 85
ATP: Example
ATP: Example (cont.)

ATP: Example (cont.)
Take excess units from April

ATP in April = (10+100) – 70 = 40 = 30
ATP in May = 100 – 110 = -10 =0
ATP in June = 100 – 50 = 50

Operations Management: William J. Stevenson

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12-1 Aggregate Planning

Overview of Planning Levels

 Short-range plans (Detailed plans)

 Intermediate plans (General levels)

Aggregate planning: Intermediate-range

Now 2 months 1 Year

Aggregate Planning Process

Aggregate Planning Inputs

 Demand forecast  Hiring/firing

Aggregate Planning Outputs

 Total cost of a plan

Aggregate Planning Strategies

 Hire and layoff workers

Strategies for Adjusting Capacity

 Chase demand strategy:

Techniques for Aggregate Planning

1. Determine demand for each period

Average Beginning Inventory + Ending Invento

Find the total cost of an aggregate plan using:

Aggregate Plan to Master Schedule

Aggregate Jan Feb March

Jan Feb March

Disaggregating the Aggregate Plan

 Master schedule: The result of disaggregating

 Evaluates impact of new orders

 Deals with problems

Master Scheduling Process

Customer orders Uncommitted inventory

Projected On-hand Inventory

Projected on-hand Inventory from Current week’s

Month June July

Projected On-hand Inventory

Customer orders are Forecast is larger than

ATP in period 1 = (On-hand quantity + MPS in period 1) –

Month June July

ATP: Example (cont.)

ATP: Example (cont.)

Take excess units from April

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