Aggregate Planning

By
Dr. Debadyuti Das
Aggregate Planning: An overview

 Intermediate range capacity planning that

usually covering 2 to 24 months (or 1 to 18
months)
 Goal is to achieve a production plan that will
effectively utilize the organization’s resources
to satisfy expected demand.
 Types of production plan
Type of Planning Planning Planning Decision Planning
plans objectives inputs horizon variables outputs

Long-term To achieve Corporate 5-10 years Long-term Plans for

plan specific strategies & capacity capacity
organization- policies, resource expansion (or
al objectives  Demand allocation for: contraction)
To enhance forecasts, products, Plans for

long-term  Economic, Processes and - new products,

viability and technological & markets -new technologies,
development political scenario, -new markets,
 Available
-new plants and
capital etc. their location.
 Types of production plan
Type of Planning Planning Planning Decision Planning
plans objectives inputs horizon variables outputs

Medium To make the Long-term 1-18 Levels of use Aggregate

term plan most effective plans months for available production plans
(or use of Limits on production specifying how
Aggregate available present alternatives: demand will be
plan) capacity capacity Work-force met from existing
through Period by size, productive
existing resources
period annual Production
resources demand rate,
forecast Inventory,
Feasible Sub-
production contracting
alternatives
and costs
 Types of production plan
Type of Planning Planning Planning Decision Planning
plans objectives inputs horizon variables outputs

Short- To ensure Aggregate 1-30 days Size of work- Production

term plan customer production plan force schedule

satisfaction Orders Production rate Assigning orders
through received Sequencing of to specific
prompt Desired Departments,
orders
delivery times Shifts, Personnel,
delivery times
To achieve Equipments etc.
maximum
effectiveness
from the use
of production
factors
Planning Sequence

Economic,
Corporate competitive, Aggregate
strategies and political demand
and policies conditions forecasts

Establishes operations
Business Plan
and capacity strategies

Establishes
Aggregate plan
operations capacity

Master schedule Establishes schedules

for specific products
Aggregate planning

Aggregate planning:
 process by which a company determines levels of
capacity, production, subcontracting, inventory,
stock outs, and pricing over a specified time
horizon
 goal is to maximize profit
 decisions made at a product family (not SKU)
level
 time frame of 1 to 18 months
 how can a firm best use the facilities it has?
Operational parameters of AP

Specify operational parameters over the time

horizon:
 production rate
 workforce
 Overtime/under time
 machine capacity level
 subcontracting
 backlog
 inventory on hand
The Aggregate Planning Problem

 Given the demand forecast for each period in the

planning horizon, determine the production level,
inventory level, and the capacity level for each
period that maximizes the firm’s profit over the
planning horizon
 Specify the planning horizon (typically 1-18 months)
 Specify the duration of each period
 Specify key information required to develop an
aggregate plan
Information Needed for
an Aggregate Plan
 Demand forecast in each period
 Production costs
 labor costs, regular time ($/hr) and overtime ($/hr)
 subcontracting costs ($/hr or $/unit)
 cost of changing capacity: hiring or layoff ($/worker) and cost
of adding or reducing machine capacity ($/machine)
 Labor/machine hours required per unit
 Inventory holding cost ($/unit/period)
 Stock out or backlog cost ($/unit/period)
 Constraints: limits on overtime, layoffs, capital
available, stockouts and backlogs
 Outputs of Aggregate Plan
 Production quantity from regular time, overtime, and
subcontracted time: used to determine number of workers
and supplier purchase levels
 Inventory held: used to determine how much warehouse
space and working capital is needed
 Backlog/stockout quantity: used to determine what
customer service levels will be
 Machine capacity increase/decrease: used to determine if
new production equipment needs to be purchased
 A poor aggregate plan can result in lost sales, lost profits,
excess inventory, or excess capacity
Aggregate Planning Strategies
 Proactive
 Alter demand to match capacity
 Reactive
 Alter capacity to match demand
(Chase strategy: using capacity as the lever
Level strategy: using inventory as the lever
Time flexibility Strategy: using utilization as the lever)
 Mixed
 Some of each
Demand Options
 Pricing

 Promotion

 Back orders

 New demand
Capacity Options
 Hire and layoff workers
 Overtime/under time
 Part-time workers
 Inventories
 Subcontracting
 Chase Strategy
 Production rate is synchronized with demand by
varying machine capacity or hiring and laying
off workers as the demand rate varies
 However, in practice, it is often difficult to vary
capacity and workforce on short notice
 Expensive if cost of varying capacity is high
 Negative effect on workforce morale
 Results in low levels of inventory
 Should be used when inventory holding costs
are high and costs of changing capacity are low
 Time Flexibility Strategy
 Can be used if there is excess machine capacity
 Workforce is kept stable, but the number of hours worked
is varied over time to synchronize production and demand
 Can use overtime or a flexible work schedule
 Requires flexible workforce, but avoids morale problems
of the chase strategy
 Low levels of inventory, lower utilization
 Should be used when inventory holding costs are high
and capacity is relatively inexpensive
 Level Strategy
 Maintain stable machine capacity and workforce
levels with a constant output rate
 Shortages and surpluses result in fluctuations in
inventory levels over time
 Inventories are built up in anticipation of future
demand or backlogs are carried over from high to
low demand periods
 Better for worker morale
 Large inventories and backlogs may accumulate
 Should be used when inventory holding and
backlog costs are relatively low
Fundamental Tradeoffs in Aggregate
Planning
 Capacity (regular time, overtime, subcontract)
 Inventory
 Backlog / lost sales
 Techniques and general procedure for
APP
Techniques:
 Trial and error method
 Linear programming

Procedure:
 Determine demand for each period.
 Determine capacities (regular time, O/T, Subcontracting)
for each period.
 Identify company policies
 Determine unit costs for regular time, O/T,
subcontracting, inventories, back orders, layoffs and
other relevant costs.
 Develop alternative plans and compute the costs for
each.
 Select the one that best satisfies the objectives.
 Example 1: Trial & Error method
Planners of a company have obtained information regarding the forecasted
demand of a product as follows:
Period 1 2 3 4 5 6 Total
Forecast 200 200 300 400 500 200 1800

Costs
Regular time: $2/unit
Overtime: $3/unit
Subcontract: $6/unit
Inventory: $1/unit
Backorder: $5/unit
They now want to evaluate a plan that calls for a steady rate of regular-time
output, mainly using inventory to absorb the uneven demand but allowing
some backlog. Overtime and subcontracting are not used because they want
steady output. They intend to start with zero inventory on hand in the first
period. Prepare an aggregate plan and determine its cost using the
preceding information. Assume a level output rate of 300 units per period
with regular time. Note that the planned inventory is zero. There are 15
workers, each can produce 20 units per period.
 Example 2: Trial & Error method
Suppose that the regular output rate will drop to 290 units per
period due to an expected change in production
requirements. Costs will not change. Prepare an
aggregate plan and compute its total cost for each of these
alternatives:
1. Use overtime at a fixed rate of 20 units per period as
needed. Plan an ending inventory of zero for period 6.
Backlogs cannot exceed 90 units per period.
2. Use subcontracting at a maximum rate of 50 units per
period; the usage need not be the same in every period.
Have an ending inventory of zero in the last period. Again
backlogs cannot exceed 90 units in any period. Compare
these two plans.
Example 3: LP

Month Demand Forecast

January 1,600
February 3,000
March 3,200
April 3,800
May 2,200
June 2,200
Example 3: Aggregate Planning
Item Cost
Materials $10/unit
Inventory holding cost $2/unit/month
Marginal cost of a stockout $5/unit/month
Hiring and training costs $300/worker
Layoff cost $500/worker
Labor hours required 4/unit
Regular time cost $4/hour
Over time cost $6/hour
Cost of subcontracting $30/unit
 Aggregate Planning
(Define Decision Variables)
Wt = Workforce size for month t, t = 1, ..., 6
Ht = Number of employees hired at the beginning of month t,
t = 1, ..., 6
Lt = Number of employees laid off at the beginning of month t,
t = 1, ..., 6
Pt = Production in month t, t = 1, ..., 6
It = Inventory at the end of month t, t = 1, ..., 6
St = Number of units stocked out at the end of month t,
t = 1, ..., 6
Ct = Number of units subcontracted for month t, t = 1, ..., 6
Ot = Number of overtime hours worked in month t, t = 1, ..., 6
Aggregate Planning
(Define Objective Function)
6 6
Min  640W t   300 H t
t 1 t 1
6 6 6
  500 Lt   6 Ot   2 I t
t 1 t 1 t 1
6 6 6
  5 S t  10 Pt   30 C t
t 1 t 1 t 1
Aggregate Planning (Define
Constraints Linking Variables)
 Workforce size for each month is based
on hiring and layoffs

W t  W t 1  H t  Lt, or
W t  W t 1  H t  Lt  0
for t  1,...,6, where W 0  80.
Aggregate Planning (Constraints)
 Production for each month cannot exceed
capacity

P t W t Ot
 40  4 ,
40W t  Ot 4  Pt  0,
for t  1,...,6.
 Aggregate Planning (Constraints)
 Inventory balance for each month

I t 1  Pt  C t  Dt  S t 1  I t  S t ,
I t 1  Pt  C t  Dt  S t 1  I t  S t  0,
for t  1,...,6,where I 0  1,000,
S 0  0,and I 6  500.
Aggregate Planning (Constraints)
 Over time for each month

Ot  10W t,
10W t  Ot  0,
for t  1,...,6.