Chopra & Meindl

Supply Chain Management

(6th Edition)

Chapter 8
Aggregate Planning
in the Supply Chain

© 2007 Pearson Education 8-1

 Outline
 8.1 Role of aggregate planning in a supply chain
 8.2 The aggregate planning problem
 8.3 Aggregate planning strategies
 Implementing aggregate planning in practice
– Using linear programming (8.4)
– Using Excel (8.5)

© 2007 Pearson Education 8-2

 Aggregate Planning in a
Supply Chain
 Capacity has a cost
 Lead times are often long
 Aggregate planning:
– process by which a company determines levels of capacity, production,
subcontracting, inventory, planned stockouts, and pricing over a specified
time horizon
– Goal: Maximize profits / Minimize Cost
– Decisions relate to aggregate products, i.e., not the Stock Keeping Units
(SKU) level
– Time horizon: 3 to 18 months
– How are facilities / is capacity best used?

© 2007 Pearson Education 8-3

 Aggregate Planning in a
Supply Chain
 Objective is a specification of the following
operational parameters during the planning period:
– Production rate
– # workers
– Over time
– Capacity of capital
– Subcontracting
– Inventory levels
– Planned Backlogs

© 2007 Pearson Education 8-4

 Firm vs. Supply Chain-perspective
 Traditional focus in Aggregate Planning is on the individual firm
 Coordinated Aggregate Planning is important for Supply Chain
performance
 Collaborative forecasts provide a basis for a better Supply Chain
performance
 ‘Good’ forecasts require a collaboration with downstream Supply Chain
partnere.
 Capacity limits in aggregate planning may well be due to upstream Supply
Chain partners, i.e., external factors compared to the firm
 Vendor contracts play the roll as “forecasts with limited uncertainty” for
upstream partners
 Realization of complete value added potential requires inputs from both
upstream as well as downstream partners
 Output from Aggregate Planning is of value for both upstream and
downstream partners
– Production plan define demand for vendors’ products and capacity for the
firm’s customers

© 2007 Pearson Education 8-5

 Aggregate Planning
 Specificy planning horizon, e.g., 3-18 months
 Specificy duration of operational periods
 Specificy key info needed for aggregate planning
– Do a sales forecast for every period within planning horizon
 Identify planned production, inventory, and
capacity in each period such that profit is
maximized over the planning horizon

© 2007 Pearson Education 8-6

 Key info for Aggregate Planning
 Sales-forecast for every operational period
 Production cost
– Labour cost, regular time ($/time) and over time ($/time)
– Cost of Subcontracting / Outsourcing ($/hour or $/unit)
– Cost driven by capacity changes, i.e., hiring or layoff ($/person) and cost due
to expansion/reduction of capital ($/machine)
 Working and machine hours needed per unit
 Inventory (holding cost) ($/unit/operational period)
 Stockout or backlog cost ($/unit/operational period)
 Additional constraints: Upper limits on over time, layoffs, capital,
stockouts, backlogs
 Initial and terminal conditions
 (“Constraints” caused by vendors)
 Outputs from Aggregate Planning
 Production quantities from regular time, over time, and sub-
contracting
– > Basis for an identification of #workers
 Inventories
– > Basis for an identification of need for inventory capacity and use
of
capital for inventories
 Backlog/stockout:
– > Basis for a specification of service levels
 Machine capacity
– > Basis for an identification of need for additional/reduced machine
capacity
 An inferior aggregate plan may imply “lost sales”, “lost profits”,
“excess inventory”, or “excess capacity”
© 2007 Pearson Education 8-8
 Strategies in Aggregate Planning
 Trade-off between capacity, inventory, and backlog/lost
sales

 Chase strategy – capacity is buffer

 Flexibility strategy – rate of utilization is buffer; excess
machine capacity combined with overtime
 Level strategy – inventory is buffer
 Mixed strategy – combination of chase/flexibility/level

© 2007 Pearson Education 8-9

 1. Chase Strategy
 Rate of production synchronized with demand by
varying machine capacity or hiring/firing
 In practice difficult to vary capacity both in terms of
machines and #workers in the short run
 Cost demanding if adjustment of capacity is costly
 Negative impact on work environment
 Low levels of inventory
 Holding cost avoided
 Advantageous if holding cost is high and cost of
capacity adjustment low
© 2007 Pearson Education 8-10
 1. Time Flexibility Strategy
 Excess capacity of machines required
 # workers constant, but # working hours synchronized
with production and demand
 Overtime or flexible work schedules needed
 Workers must be flexible
 Negative impact on work environment as in chase
avoided to some extent
 Low levels of inventory
 Applicable when holding cost is high and capacity is
cheap
© 2007 Pearson Education 8-11
 1. Level Strategy
 Stable machine capacity, # workers stable, output rate
constant
 Inventories built in expectation of future demand.
 Backlogs transferred from periods with high to periods
with low demand
 Variability in production avoided
 High levels of inventory or backlogs can be
accumulated
 Advantageous if holding and backlog cost are
relatively low
© 2007 Pearson Education 8-12
 Fundamental Tradeoffs in
Aggregate Planning
 Capacity (regular time, overtime, subcontracting)
 Inventory
 Backlog / lost sales

Basic Strategies
 Chase
 Flexible / Time
 Level

© 2007 Pearson Education 8-13

 Fundamental Tradeoffs in
Aggregate Planning

 Identify optimum trade off

 Optimization approach for cost minimization
 Linear programming / Integer programming
 Solver in Excel

© 2007 Pearson Education 8-14

 Fundamental Tradeoffs in
Aggregate Planning

 Set up model
 Collect data / Parameter estimates
 Identify decision variables
 Identify goal -> Criterion function
 Identify conditions -> Constraints
 Build model in Excel

© 2007 Pearson Education 8-15

 Fundamental Tradeoffs in
Aggregate Planning

 Solve model
 Solution report
 Sensitivity analysis
 Validation -> modify if needed
 Implement plan

© 2007 Pearson Education 8-16

 Case: Aggregate Planning at
“Red Tomato”

Month Demand Forecast

January 1,600
February 3,000
March 3,200
April 3,800
May 2,200
June 2,200

Large seasonal variation

© 2007 Pearson Education 8-17
 Parameter estimates
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

© 2007 Pearson Education 8-18

 Decision variables
Wt = Number of workers time t, t =1,...,6
Ht = Number of workers hired primo period t, t =1,...,6
Lt = Number of workers fired primo period t, t = 1, ..., 6
Pt = Production period t, t =1,...,6
It = Ultimo inventory period t, t =1,...,6
St = Number of units in backlog (stocked out) ultimo period t,
t =1,...,6
Ct = Number of units subcontracted period t, t =1,...,6
Ot = Number of over time hours period t, t =1,...,6

© 2007 Pearson Education 8-19

 Criterion
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

© 2007 Pearson Education 8-20

 Criterion
Why not maximize profit?

I.e., why not:

Max revenue – cost

© 2007 Pearson Education 8-21

 Constraints (linking variables)
 Number of workers period t:

W W t t 1
 H t
 L t
, or

W W t t 1
 H t
 L t
 0
for t  1,..., 6, where W 0
 80.

© 2007 Pearson Education 8-22

 Constraints

 Production cannot exceed capacity in any period:

Pt  40Wt  Ot / 4,
40Wt  Ot / 4  Pt  0,
for t  1,..., 6.

© 2007 Pearson Education 8-23

 Constraints
 Inventory balance period t
(must hold by definition)

I t 1
 P t
 C t
 D t
 S t 1
 I t
 S t
,

I t 1
 C   S
P t t D t t 1 I t t
   S  0,
for t  1,..., 6, where I 0  1, 000,
S0  0, and I 6  500.
© 2007 Pearson Education 8-24
 Constraints
 Overtime period t:

Ot  10Wt ,
10Wt  Ot  0,
for t  1,..., 6
© 2007 Pearson Education 8-25
 Recall Parameter estimates:
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

© 2007 Pearson Education 8-26

 4 Scenarios

1. Initial parameter estimates (base case)

2. Increase variability in demand -> seasonal
variability
3. Holding cost increased from $2 -> $6 per unit
per month
4. Lower overtime cost $6 -> $4.1

© 2007 Pearson Education 8-27

 Red Tomato’s 1. Plan
Aggregate Plan Decision Variables
Ht Lt Wt Ot It St Ct Pt
Period # Hired # Laid off # Workforce Overtime Inventory Stockout Subcontract Production Demand Price
0 0 0 80 0 1.000 0 0
1 0 15 65 0 1.983 0 0 2.583 1.600 40
2 0 0 65 0 1.567 0 0 2.583 3.000 40
3 0 0 65 0 950 0 0 2.583 3.200 40
4 0 0 65 0 0 267 0 2.583 3.800 40
5 0 0 65 0 117 0 0 2.583 2.200 40
6 0 0 65 0 500 0 0 2.583 2.200 40
Middel --------------------------------------------------------> 0 874 38 0

Aggregate Plan Costs OPRINDELIG

Period Hiring Lay off Regular time Overtime Inventory Stockout Subcontract Material
1 0 7.708 41.333 0 3.967 0 0 25.833
2 0 0 41.333 0 3.133 0 0 25.833
3 0 0 41.333 0 1.900 0 0 25.833
4 0 0 41.333 0 0 1.333 0 25.833
5 0 0 41.333 0 233 0 0 25.833
6 0 0 41.333 0 1.000 0 0 25.833
Total Cost = $ 422.275 =+SUM(B15:I20)

Total Revenue = $ 640.000 =SUMPRODUKT(J5:J10;K5:K10)

Profit = $ 217.725 =C24-C22 4

3
© 2007 Pearson Education 8-28
 Increased seasonal variability
Scenario 2

Month Demand Demand

Forecast før Forecast nu

January 1,600 1,000

February 3,000 3,000
March 3,200 3,800
April 3,800 4,800
May 2,200 2,000
June 2,200 1,400
Total 16000 16000

© 2007 Pearson Education 8-29

 Aggregate Plan Decision Variables
Comparison of plans
Ht Lt Wt Ot It St Ct Pt
Period # Hired # Laid off # Workforce Overtime Inventory Stockout Subcontract Production Demand Price
0 0 0 80 0 1.000 0 0
1 0 15 65 0 1.983 0 0 2.583 1.600 40
2 0 0 65 0 1.567 0 0 2.583 3.000 40
3 0 0 65 0 950 0 0 2.583 3.200 40
4 0 0 65 0 0 267 0 2.583 3.800 40
5 0 0 65 0 117 0 0 2.583 2.200 40
6 0 0 65 0 500 0 0 2.583 2.200 40
Middel --------------------------------------------------------> 0 874 38 0
Aggregate Plan Decision Variables
Ht Lt Wt Ot It St Ct Pt
Period # Hired # Laid off # Workforce Overtime Inventory Stockout Subcontract Production Demand
0 0 0 80 0 1.000 0 0
1 0 15 65 0 2.583 0 0 2.583 1.000
2 0 0 65 0 2.167 0 0 2.583 3.000
3 0 0 65 0 950 0 0 2.583 3.800
4 0 0 65 0 0 1.267 0 2.583 4.800
5 0 0 65 0 0 683 0 2.583 2.000
6 0 0 65 0 500 0 0 2.583 1.400
Middel --------------------------------------------------------> 0 1029 279 0

Ht Lt Wt Ot It St Ct Pt
Period # Hired # Laid off # Workforce Overtime Inventory Stockout Subcontract Production Demand Price
0 0 0 80 0 1.000 0 0
1 0 23 57 0 1.667 0 0 2.267 1.600 40
2 0 0 57 0 933 0 0 2.267 3.000 40
3 0 0 57 0 0 0 0 2.267 3.200 40
4 0 0 57 0 0 67 1.467 2.267 3.800 40
5 0 0 57 0 0 0 0 2.267 2.200 40
6 0 0 57 0 500 0 433 2.267 2.200 40
Middel --------------------------------------------------------> 0 586 10 271
© 2007 Pearson Education 8-30
 Aggregate Plan Decision Variables
Comparison of plans (level)
Ht Lt Wt Ot It St Ct Pt
Period # Hired # Laid off # Workforce Overtime Inventory Stockout Subcontract Production Demand Price
0 0 0 80 0 1.000 0 0
1 0 15 65 0 1.983 0 0 2.583 1.600 40
2 0 0 65 0 1.567 0 0 2.583 3.000 40
3 0 0 65 0 950 0 0 2.583 3.200 40
4 0 0 65 0 0 267 0 2.583 3.800 40
5 0 0 65 0 117 0 0 2.583 2.200 40
6 0 0 65 0 500 0 0 2.583 2.200 40
Middel --------------------------------------------------------> 0 874 38 0
Aggregate Plan Decision Variables
Ht Lt Wt Ot It St Ct Pt
Period # Hired # Laid off # Workforce Overtime Inventory Stockout Subcontract Production Demand
0 0 0 80 0 1.000 0 0
1 0 15 65 0 2.583 0 0 2.583 1.000
2 0 0 65 0 2.167 0 0 2.583 3.000
3 0 0 65 0 950 0 0 2.583 3.800
4 0 0 65 0 0 1.267 0 2.583 4.800
5 0 0 65 0 0 683 0 2.583 2.000
6 0 0 65 0 500 0 0 2.583 1.400
Middel --------------------------------------------------------> 0 1029 279 0

Ht Lt Wt Ot It St Ct Pt
Period # Hired # Laid off # Workforce Overtime Inventory Stockout Subcontract Production Demand Price
0 0 0 80 0 1.000 0 0
1 0 23 57 0 1.667 0 0 2.267 1.600 40
2 0 0 57 0 933 0 0 2.267 3.000 40
3 0 0 57 0 0 0 0 2.267 3.200 40
4 0 0 57 0 0 67 1.467 2.267 3.800 40
5 0 0 57 0 0 0 0 2.267 2.200 40
6 0 0 57 0 500 0 433 2.267 2.200 40
Middel --------------------------------------------------------> 0 586 10 271
© 2007 Pearson Education 8-31
4.000 1. scenario:
3.500

3.000

2.500 Lager
Stockout
2.000 Subcontract
Produktion
1.500 Eftersp

1.000

500

0
0 1 2 3 4 5 6

3. scenario:
Production down
2. scenario:
4.000
Inventory down
3.500 Stockout down (??)
Production unchanged
Subcontracting up
Inventory up 3.000
Stockout up
2.500 Lager
Stockout
2.000 Subcontract
Produktion
1.500 Eftersp

1.000

500

0
0 1 2 3 4 5 6
 Comparison of plans
 Why does stockout decrease in Scenario 3?
 ”Hire/Fire”-cost prohibitive prohibitive  level prod.
 Decrease prod. to a certain common level
 Hence, fraction of demand must be covered by
subcontracting (why?)
 Subcontracting what cannot be met by production and
inventory
 Why stockout = 67 in april? Why not increase
subcontracting and avoid stockout?

© 2007 Pearson Education 8-33

 Structure in Excel sheet

>=0, decision variables >=0, constraints

© 2007 Pearson Education Ultimo stock 8-34
 Ultimo stock

Excel, Red Tomato scenario 1

Decision variables, variable cells

a b c
Aggregate Plan Decision Variables d e f g h i j k m
Constraints why 0, why 646
Ht Lt Wt Ot It St Ct Pt
Period # Hired # Laid off # Workforce Overtime Inventory Stockout Subcontract Production Demand Price Workforce Capacity Inventory Over time
0 0 0 80 0 1.000 0 0
1 0 15 65 0 1.983 0 0 2.583 1.600 40 0 0 0 646
2 0 0 65 0 1.567 0 0 2.583 3.000 40 0 0 0 646
3 0 0 65 0 950 0 0 2.583 3.200 40 0 0 0 646
4 0 0 65 0 0 267 0 2.583 3.800 40 0 0 0 646
5 0 0 65 0 117 0 0 2.583 2.200 40 0 0 0 646
6 0 0 65 0 500 0 0 2.583 2.200 40 0 0 0 646
Middel --------------------------------------------------------> 0 874 38 0

Aggregate Plan Costs OPRINDELIGE DATA, TABEL 8.1, side 223

Ligning 8.2 Ligning 8.3 Ligning 8.4Ligning 8.5
Period Hiring Lay off Regular time Overtime Inventory Stockout Subcontract Material =D5-D4-B5+C5 =40*D5+E5/4-I5 =F4-G4+I5+ =-E5+10*D5
1 0 7.708 41.333 0 3.967 0 0 25.833 H5-J5-F5+G5
2 0 0 41.333 0 3.133 0 0 25.833
3 0 0 41.333 0 1.900 0 0 25.833
4 0 0 41.333 0 0 1.333 0 25.833
5 0 0 41.333 0 233 0 0 25.833
6 0 0 41.333 0 1.000 0 0 25.833
Total Cost = $ 422.275 =+SUM(B15:I20)

Total Revenue = $ 640.000 =SUMPRODUKT(J5:J10;K5:K10)

4.000
Profit = $ 217.725 =C24-C22

3.500
Følgende er formlerne fra B15 til H15
=+'Tables8.1,2'!$B$19*B5
=+C6*'Tables8.1,2'!$B$20 3.000
+D5*'Tables8.1,2'!$B$22*8*20
=+E5*'Tables8.1,2'!$B$23 2.500

Average Inventory: 894,444 2.000

=(((F4+F10)/2)+SUM(F5:F9))/6

1.500
Average time in inventory: 894,444 / 2666,667 0,335
måned
=((((F4+F10)/2)+SUM(F5:F9))/6)
1.000
© 2007 Pearson Education =(@sum(J5:J10)/6) 8-35
=((((F4+F10)/2)+SUM(F5:F9))/6)/(@sum(J5:J10)/6)
 Excel, Red Tomato scenario 2
Aggregate Plan Decision Variables Constraints
Ht Lt Wt Ot It St Ct Pt
Period # Hired # Laid off # Workforce Overtime Inventory Stockout Subcontract Production Demand Price Workforce Capacity Inventory Over time
0 0 0 80 0 1.000 0 0
1 0 15 65 0 2.583 0 0 2.583 1.000 40 0 0 0 646
2 0 0 65 0 2.167 0 0 2.583 3.000 40 0 0 0 646
3 0 0 65 0 950 0 0 2.583 3.800 40 0 0 0 646
4 0 0 65 0 0 1.267 0 2.583 4.800 40 0 0 0 646
5 0 0 65 0 0 683 0 2.583 2.000 40 0 0 0 646
6 0 0 65 0 500 0 0 2.583 1.400 40 0 0 0 646
Middel --------------------------------------------------------> 0 1029 279 0

Aggregate Plan Costs HØJERE SÆSONVARIATION HER, tabel 8.4 side 228!!
Ligning 8.2 Ligning 8.3 Ligning 8.4Ligning 8.5
Period Hiring Lay off Regular time Overtime Inventory Stockout Subcontract Material =D5-D4-B5+C5 =40*D5+E5/4-I5 =F4-G4+I5+ =-E5+10*D5
1 0 7.708 41.333 0 5.167 0 0 25.833 H5-J5-F5+G5
2 0 0 41.333 0 4.333 0 0 25.833
3 0 0 41.333 0 1.900 0 0 25.833
4 0 0 41.333 0 0 6.333 0 25.833
5 0 0 41.333 0 0 3.417 0 25.833
6 0 0 41.333 0 1.000 0 0 25.833
Total Cost = $ 432.858 =+SUM(B15:I20)
4.000
Total Revenue = $ 640.000 =SUMPRODUKT(J5:J10;K5:K10)
Profit = $ 207.142 =C24-C22
3.500

Følgende er formlerne fra B15 til H15 3.000

=+'Tables8.1,2'!$B$19*B5
=+C6*'Tables8.1,2'!$B$20
+D5*'Tables8.1,2'!$B$22*8*20 2.500 Lager
=+E5*'Tables8.1,2'!$B$23 Stockout
2.000 Subcontract
Average Inventory: 1075 Produktion
=(((F4+F10)/2)+SUM(F5:F9))/6
1.500 Eftersp

Average time in inventory: 1075,000 / 2666,667 0,403måned

=((((F4+F10)/2)+SUM(F5:F9))/6) 1.000
=(@sum(J5:J10)/6)
© 2007 Pearson Education =((((F4+F10)/2)+SUM(F5:F9))/6)/(@sum(J5:J10)/6)
500 8-36
 Excel, Red Tomato scenario 3

© 2007 Pearson Education 8-37

 Excel, Red Tomato scenario 4
Aggregate Plan Decision Variables Constraints
Ht Lt Wt Ot It St Ct Pt
Period # Hired # Laid off # Workforce Overtime Inventory Stockout Subcontract Production Demand Price Workforce Capacity Inventory Over time
0 0 0 80 0 1.000 0 0
1 0 16 64 0 1.957 0 0 2.557 1.600 40 0 0 0 639
2 0 0 64 0 1.513 0 0 2.557 3.000 40 0 0 0 639
3 0 0 64 0 870 0 0 2.557 3.200 40 0 0 0 639
4 0 0 64 639 0 213 0 2.716 3.800 40 0 0 0 0
5 0 0 64 0 143 0 0 2.557 2.200 40 0 0 0 639
6 0 0 64 0 500 0 0 2.557 2.200 40 0 0 0 639
Middel --------------------------------------------------------> 91 855 30 0

Aggregate Plan Costs LAVERE OVERTIDSBETALING, sættes ned fra $6 t

Ligning 8.2 Ligning 8.3 Ligning 8.4Ligning 8
Period Hiring Lay off Regular time Overtime Inventory Stockout Subcontract Material =D5-D4-B5+C5=40*D5+E5/4-I5 =F4-G4+I5+ =-E5+10*D5
1 0 8.041 40.907 0 3.913 0 0 25.567 H5-J5-F5+G5
2 0 0 40.907 0 3.027 0 0 25.567
3 0 0 40.907 0 1.740 0 0 25.567
4 0 0 40.907 2.621 0 1.067 0 27.165
5 0 0 40.907 0 287 0 0 25.567
6 0 0 40.907 0 1.000 0 0 25.567
Total Cost = $ 422.139 =+SUM(B15:I20)

Total Revenue = $ 640.000 =SUMPRODUKT(J5:J10;K5:K10)

Profit = $ 217.861 =C24-C22 Ny overtidsbetaling 4,1

4.000
Følgende er formlerne fra B15 til H15
=+'Tables8.1,2'!$B$19*B5
=+C6*'Tables8.1,2'!$B$20 3.500
+D5*'Tables8.1,2'!$B$22*8*20
=+E5*'Tables8.1,2'!$B$23
3.000

Average Inventory: 872,3

=(((F4+F10)/2)+SUM(F5:F9))/6 2.500

Average time in inventory: 872,251 / 2666,667 0,327 måned 2.000

1.500
© 2007 Pearson Education 8-38
 Excel, scenario 1 versus 4

© 2007 Pearson Education 8-39

 8.6 THE ROLE OF IT IN AGGREGATE
PLANNING
 Aggregate planning is the supply chain area in which information technology has been used the
most.
 The earliest IT supply chain products were aggregate planning modules, often called factory,
production, or manufacturing planning.
 These classic solutions generally formulated the aggregate planning problem as a linear
program (LP) to get a production schedule of products
 Supply chain planning modules today often combine both production planning and inventory
planning. The supply chain planning module uses the output of the forecasting module as a
constraint in setting up the production schedule and inventory levels. These production
schedules and inventory levels are used by the execution system for the actual production of
the goods and the setting of inventor levels throughout the supply chain. Given the complexity
of the problem, aggregate planning modules can add significant value even for small
companies.
 There are a number of dimensions along which IT can add value in the aggregate planning
realm:
– The ability to handle large problems
– The ability to handle complex problems (through either nonlinear optimization or linear
approximations)
– The ability to interact with other core IT systems such as inventory management and sourcing
 Because aggregate planning problems are so complex, there is often no other way to arrive at a
feasible solution than through IT.

© 2007 Pearson Education 8-40

 FORECAST ERROR IN AGGREGATE
PLANS
 Forecast errors are not taken into account in the aggregate planning methodology we
have discussed
 To improve the quality of these aggregate plans, forecast errors must be taken into
account.
 Forecasting errors are dealt with using either safety inventory, defined as inventory
held to satisfy demand that is higher than forecasted, or safety capacity, defined as
capacity used to satisfy demand that is higher than forecasted,
 A company can create a buffer for forecast error using safety inventory and safely
capacity in a variety of ways, some of which are listed next:
– Use overtime as a form of safety capacity.
– Carry extra workforce permanently as a form of safety capacity.
– Use subcontractors as a form of safety capacity.
– Build and carry extra inventories as a form of safety inventory.
– Purchase capacity or product from an open or Spot market as a form of safety capacity.
 The actions a company takes depend on the relative cost of the choices.
 Of course, if in practice a company can vary the capacity on short notice by hiring
extra people, this is always an option. The problem with this option relates to the
cost (monetary as well as morale) of letting them go later.

Power-production
© 2007 Pearson Education 8-41
 Aggregate Planning in Practice
 Extend planning from individual firm to the
supply chain
 Flexible plans because forecasts are uncertain
– Sensitivity analysis
 “Rerun” aggregate plan when new information
becomes available
 Lean on aggregate planning when utilization of
resources increases

© 2007 Pearson Education 8-42

 Summary of Learning Objectives
 What types of decisions are best solved by aggregate
planning?
 What is the importance of aggregate planning as a
supply chain activity?
 What kinds of information are needed to produce an
aggregate plan?
 What are the basic trade-offs a manager makes to
produce an aggregate plan?
 How are aggregate planning problems formulated and
solved using Microsoft Excel?
© 2007 Pearson Education 8-43