Aggregate planning

Dr. Zsuzsanna Hauck

hauckzs@ktk.pte.hu
Sources and further reading

• Heizer, J; Render, B.M.; Munson, C. (2017):

Operations Management: Sustainability and Supply
Chain Management, Pearson, 12th, Global Edition,
Chapter 13
• Related OM blog for case studies:
https://heizerrenderom.wordpress.com/
What do we know so far?

• Goods vs. Services

• Operations – Marketing – Finance interface
• Mission and strategy
• Competitive priorities
• Products & processes
• Capacity management
• Location
Aggregate planning

The objective of aggregate planning is to

meet forecast demand while minimizing
cost over the planning period.
demand

time
Capacity options

1. Changing inventory levels

 Increase inventory in low demand periods to
meet high demand in the future
 Increases costs associated with storage,
insurance, handling, obsolescence, pilferage,
and capital investment
 Shortages may mean lost sales due to long
lead times and poor customer service
Capacity options

2. Varying workforce size by hiring or

layoffs
 Match production rate to demand
 Training and separation costs for hiring and laying
off workers
 New workers may have lower productivity
 Laying off workers may lower morale and
productivity
Capacity options

3. Varying production rates through

overtime or idle time
 Allows constant workforce
 May be difficult to meet large increases in
demand
 Overtime can be costly and may drive down
productivity
 Absorbing idle time may be difficult
Capacity options

4. Subcontracting
 Temporary measure during periods of peak
demand
 May be costly
 Assuring quality and timely delivery may be
difficult
 Exposes your customers to a possible
competitor
Capacity options

5. Using part-time workers

 Useful for filling unskilled or low skilled
positions, especially in services
Demand options

1. Influencing demand
 Use advertising or promotion to increase
demand in low periods
 Attempt to shift demand to slow periods
 May not be sufficient to balance demand
and capacity
Demand options

2. Backordering during high-demand

periods
 Requires customers to wait for an order
without loss of goodwill or the order
 Most effective when there are few if any
substitutes for the product or service
 Often results in lost sales
Demand options

3. Counterseasonal product and

service mixing
 Develop a product mix of counterseasonal
items
 May lead to products or services outside the
company’s areas of expertise
A best practice: Walmart’s EDLP strategy

demand

capacity

time
Inputs and outputs of aggregate planning

Operations: Marketing: Finance:

capacity of workforce demand financial
and machines, forecasts, conditions,
production costs, sales promotions,
costs
inventory pricing, etc.

Human
Procurement: Resources:
AGGREGATE
Supplier PLAN training, labor
capacities and market
costs information

 production rate
 utilization of workforce and machines
 inventories and backlogs
 outsourcing
 production costs per period
Aggregate planning: Staffing Plan, Production Plan

Level strategy Chase strategy

• Produce the same • Produce the amount of

amount in every period demand in every period

demand demand

time time
Aggregate planning: Staffing Plan, Production Plan

Level strategy Chase strategy

• Produce the same • Produce the amount of

amount in every period demand in every period

• Tools • Tools
– Inventories – Hire & fire
– Overtime
– Outsourcing
Aggregate planning: Staffing Plan, Production Plan

Level strategy Chase strategy

• Advantages: • Advantages:
– Stability – No inventories

• Disadvantages: • Disadvantages:
– Inventories – Seasonality is
– Backlogs unfavorable for
workers
– Not always possible
to hire & fire often
(e.g. highly skilled
employees)
Aggregate planning: „Third options”

• Demand management

• Combined strategy

demand

time
Aggregate planning exercises

• Staffing plan: work cannot be

inventoried
• Production plan: inventories
Staffing plan (SP0.)

Number of emlpoyees needed for the next 6 periods,

respectively:
6, 12, 18, 15, 13, 14 employees
Current number of employees: 10
All demand must be satisfied
Overtime: max. 20%
Staffing plan (SP0.)

Costs:
Regular working hours: 200,000 Ft/period
Overtime: 50% more
Idle time is also paid
Hiring cost: 200,000 Ft/employee
Firing cost: 100,000 Ft/employee
 Level strategy

1 2 3 4 5 6 ∑
Demand 6 12 18 15 13 14 78
Létszám 15 15 15 15 15 15 90
Nem dolgozik 9 3 0 0 2 1 15
Regular
Túlórázik working
0 hour
0 3+ overtime
0 0 0 should3
be enough6 to12satisfy
Dolgozik 15 15 the13highest
14 75
Felvétel 5 demand:
0 0 0 0 0 5
Elbocsátás 018/1,2
0 =0 150 0 0 0

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 Level strategy

1 2 3 4 5 6 ∑
Demand 6 12 18 15 13 14 78
Employees 15 15 15 15 15 15 90
Nem dolgozik 9 3 0 0 2 1 15
Túlórázik 0 0 3 0 0 0 3

Dolgozik 6 12 15 15 13 14 75
Felvétel 5 0 0 0 0 0 5
Elbocsátás 0 0 0 0 0 0 0

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 Level strategy

1 2 3 4 5 6 ∑
Demand 6 12 18 15 13 14 78
Employees 15 15 15 15 15 15 90
Idle time 9 3 0 0 2 1 15
Overtime 0 0 3 0 0 0 3

Dolgozik 6 12 15 15 13 14 75
Felvétel 5 0 0 0 0 0 5
Elbocsátás 0 0 0 0 0 0 0

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 Level strategy

1 2 3 4 5 6 ∑
Demand 6 12 18 15 13 14 78
Employees 15 15 15 15 15 15 90
Idle time 9 3 0 0 2 1 15
Overtime 0 0 3 0 0 0 3

Regular work 6 12 15 15 13 14 75
Hiring 5 0 0 0 0 0 5
Firing 0 0 0 0 0 0 0

We start with 10
25
employees.
 Level strategy

Costs 1 2 3 4 5 6 ∑
Regular salary 1.2 2.4 3 3 2.6 2.8 15
Idle time 1.8 0.6 0 0 0.4 0.2 3
Overtime 0 0 0.9 0 0 0 0.9
Hiring 1 0 0 0 0 0 1
Firing 0 0 0 0 0 0 0

Total sum 4 3 3.9 3 3 3 19.9

6200,000 Ft = 1.2 million 30.21.5 = 0.9

Ft
26
 Chase strategy

1 2 3 4 5 6 ∑
Demand 6 12 18 15 13 14 78
Employees 6 12 18 15 13 14 78
Idle time 0 0 0 0 0 0 0
Overtime 0 0 0 0 0 0 0

Regular work 6 12 18 15 13 14 78
Hiring 0 6 6 0 0 1 13
Firing 4 0 0 3 2 0 9

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 Chase strategy

Costs 1 2 3 4 5 6 ∑
Regular salary 1.2 2.4 3.6 3 2.6 2.8 15.6
Idle time 0 0 0 0 0 0 0
Overtime 0 0 0 0 0 0 0
Hiring 0 1.2 1.2 0 0 0.2 2.6
Firing 0.4 0 0 0.3 0.2 0 0.9

Total sum 1.6 3.6 4.8 3.3 2.8 3 19.1

4100,000Ft = 0,4 million

Ft
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 Combined strategy I.

1 2 3 4 5 6 ∑
Demand 6 12 18 15 13 14 78
Employees 6 12 15 15 14 14 76
Idle time 0 0 0 0 1 0 1
Overtime 0 0 3 0 0 0 3

Regular work 6 12 15 15 13 14 75
Hiring 0 6 3 0 0 0 9
Firing 4 0 0 0 1 0 5

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 Combined strategy I.

Costs 1 2 3 4 5 6 ∑
Regular salary 1.2 2.4 3 3 2.6 2.8 15
Idle time 0 0 0 0 0.2 0 0.2
Overtime 0 0 0.9 0 0 0 0.9
Hiring 0 1.2 0.6 0 0 0 1.8
Firing 0.4 0 0 0 0.1 0 0.5

Total sum 1.6 3.6 4.5 3 2.9 2.8 18.4

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 Combined strategy II.

1 2 3 4 5 6 ∑
Demand 6 12 18 15 13 14 78
Employees 10 12 15 15 14 14 80
Idle time 4 0 0 0 1 0 5
Overtime 0 0 3 0 0 0 3

Dolgozik 6 12 15 15 13 14 75
Felvétel 0 2 3 0 0 0 5
Elbocsátás 0 0 0 0 1 0 1

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 Combined strategy II.

Costs 1 2 3 4 5 6 ∑
Regular salary 1.2 2.4 3 3 2.6 2.8 15
Idle time 0.8 0 0 0 0.2 0 1
Overtime 0 0 0.9 0 0 0 0.9
Hiring 0 0.4 0.6 0 0 0 0.9
Firing 0 0 0 0 0.1 0 0.1

Total sum 2.0 2.8 4.5 3 2.9 2.8 17.9

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