Aggregate Planning

Planning Hierarchies in Operations

Business Plan

Marketing Plan Financial Plan

Operations Plan
(rough cut capacity)
Level 1

Level 2
Master Operations Schedule

Materials Capacity
Requirement Requirement
Plan Plan

Detailed Scheduling

Level 3 Shop Floor Control

 Aggregate Operations Planning
Decision Variables: An illustration
• The decisions involve
– Amount of resources (productive capacity and labour hours) to be committed
– Rate at which goods and services needs to be produced during a period
– Inventory to be carried forward from one period to the next
• An example from Garment Manufacturing
– Produce at the rate of 9000 metres of cloth everyday during the months of
January to March
– Increase it to 11,000 metres during April to August
– Change the production rate to 10,000 metres during September to December
– Carry 10% of monthly production as inventory during the first 9 months of
production.
– Work on a one-shift basis throughout the year with 20% over time during July
to October
The main idea behind aggregate planning

Aggregate planning
Translates business
plans into rough labor
schedules and
production plans

Aggregate planning is a “big picture” approach that does not focus on

individual products or services. Instead, the focus is on groups of similar
products of an entire product line.
Examples:
 Total number of bikes produced
 Total number of customers served
Issues to Consider for Aggregate Planning

Production rate: “aggregate units” per worker per unit time

Workforce level: available workforce in terms of hours

Actual Production: Production rate x Workforce level

Inventory: Units carried over from previous periods

Costs: production, changing workforce, inventory

What does aggregate planning do?

Given an aggregate demand forecast , determine production levels, inventory levels,

and workforce levels, in order to minimize total relevant costs over the planning
horizon

Given the number of

variables, there is not a
single optimal solution!
 Aggregate Planning
Required for aggregate planning
 A logical overall unit for measuring sales and output
 A forecast of demand for an intermediate planning period in these
aggregate terms
 A method for determining costs
 A model that combines forecasts and costs so that scheduling
decisions can be made for the planning period
 The Planning Process
Long-range plans
(over one year)
Research and Development
New product plans
Capital investments
Facility location/expansion

Top
executives Intermediate-range plans
(3 to 18 months)
Sales planning
Production planning and budgeting
Operations Setting employment, inventory,
managers subcontracting levels
Analyzing operating plans

Short-range plans
(up to 3 months)
Job assignments
Operations Ordering
managers, Job scheduling
supervisors, Dispatching
foremen Overtime
Part-time help

Responsibility Planning tasks and horizon Figure 13.1

 Aggregate Planning
Quarter 1
Jan Feb Mar
150,000 120,000 110,000

Quarter 2
Apr May Jun
100,000 130,000 150,000

Quarter 3
Jul Aug Sep
180,000 150,000 140,000
 Aggregate
Planning

Figure 13.2
 Aggregate Planning
 Combines appropriate resources into general terms
 Part of a larger production planning system
 Disaggregation breaks the plan down into greater detail
 Disaggregation results in a master production schedule
 Aggregate Planning Strategies
1. Use inventories to absorb changes in demand
2. Accommodate changes by varying workforce size
3. Use part-timers, overtime, or idle time to absorb changes
4. Use subcontractors and maintain a stable workforce
5. Change prices or other factors to influence demand
 Capacity Options
 Changing inventory levels
 Increase inventory in low demand periods to meet high demand
in the future
 Increases costs associated with storage, insurance, handling,
obsolescence, and capital investment 15% to 40%
 Shortages can mean lost sales due to long lead times and poor
customer service
 Capacity Options
 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
 Varying production rate 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
 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
 Using part-time workers
 Useful for filling unskilled or low skilled positions,
especially in services
 Demand Options
 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
 Back ordering 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
 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
 Aggregate Planning Options
Option Advantages Disadvantages Some Comments
Changing Changes in Inventory Applies mainly to
inventory human holding cost production, not
levels resources are may increase. service,
gradual or Shortages may operations.
none; no abrupt result in lost
production sales.
changes.

Varying Avoids the costs Hiring, layoff, Used where size

workforce of other and training of labor pool is
size by alternatives. costs may be large.
hiring or significant.
layoffs

Table 13.1
 Aggregate Planning Options
Option Advantages Disadvantages Some Comments
Varying Matches Overtime Allows flexibility
production seasonal premiums; tired within the
rates fluctuations workers; may aggregate plan.
through without hiring/ not meet
overtime or training costs. demand.
idle time

Sub- Permits Loss of quality Applies mainly in

contracting flexibility and control; production
smoothing of reduced profits; settings.
the firm’s loss of future
output. business.

Table 13.1
 Aggregate Planning Options
Option Advantages Disadvantages Some Comments
Using part- Is less costly High turnover/ Good for
time and more training costs; unskilled jobs in
workers flexible than quality suffers; areas with large
full-time scheduling temporary labor
workers. difficult. pools.

Influencing Tries to use Uncertainty in Creates

demand excess demand. Hard marketing
capacity. to match ideas.
Discounts draw demand to Overbooking
new customers. supply exactly. used in some
businesses.

Table 13.1
 Aggregate Planning Options
Option Advantages Disadvantages Some Comments
Back May avoid Customer must Many companies
ordering overtime. be willing to back order.
during Keeps capacity wait, but
high- constant. goodwill is lost.
demand
periods

Counter- Fully utilizes May require Risky finding

seasonal resources; skills or products or
product allows stable equipment services with
and service workforce. outside the opposite
mixing firm’s areas of demand
expertise. patterns.

Table 13.1
Methods for Aggregate Planning

 A mixed strategy may be the best way to

achieve minimum costs
 There are many possible mixed strategies
 Finding the optimal plan is not always
possible
 Mixing Options to
Develop a Plan
 Chase strategy
 Match output rates to demand forecast for
each period
 Vary workforce levels or vary production
rate
 Favored by many service organizations
 Mixing Options to
Develop a Plan
 Level strategy
 Daily production is uniform
 Use inventory or idle time as buffer
 Stable production leads to better quality
and productivity
 Some combination of capacity options, a
mixed strategy, might be the best
solution
 Graphical Methods

 Popular techniques
 Easy to understand and use
 Trial-and-error approaches that do not
guarantee an optimal solution
 Require only limited computations
 Graphical Methods
1. Determine the demand for each period
2. Determine the capacity for regular time, overtime, and
subcontracting each period
3. Find labor costs, hiring and layoff costs, and inventory holding costs
4. Consider company policy on workers and stock levels
5. Develop alternative plans and examine their total costs
 Roofing Supplier Example 1
Production Demand Per Day
Month Expected Demand Days (computed)
Jan 900 22 41
Feb 700 18 39
Mar 800 21 38
Apr 1,200 21 57
May 1,500 22 68
June 1,100 20 55
6,200 124
Table 13.2
Average Total expected demand
requirement =
Number of production days
6,200
= = 50 units per day
124
 Roofing Supplier Example 1
Forecast demand
Production rate per working day

70 – Level production using average

monthly forecast demand
60 –

50 –

40 –

30 –

0 –
Jan Feb Mar Apr May June = Month
     
22 18 21 21 22 20 = Number of
Figure 13.3 working days
 Roofing Supplier Example 2
Cost Information
Inventory carrying cost $ 5 per unit per month
Subcontracting cost per unit $10 per unit
Average pay rate $ 5 per hour ($40 per day)
$ 7 per hour
Overtime pay rate (above 8 hours per day)
Labor-hours to produce a unit 1.6 hours per unit
Cost of increasing daily production rate $300 per unit
(hiring and training)
Cost of decreasing daily production rate $600 per unit
(layoffs)
wor k fo rce
nt
Table 13.3
Plan 1 – consta
 Roofing Supplier Example 2
Monthly
Cost Information
Production at Demand Inventory Ending
Month carry
Inventory 50 Units
cost per Day Forecast $ 5Change
per unit per Inventory
month
Jan 1,100
Subcontracting cost per unit 900 $10 per unit
+200 200
Feb pay rate
Average 900 700 +200
$ 5 per 400
hour ($40 per day)
Mar 1,050 800 +250
$ 7 per hour 650
Overtime pay rate (above 8 hours per day)
Apr 1,050 1,200 -150 500
Labor-hours to produce a unit 1.6 hours per unit
May
Cost 1,100
of increasing daily production 1,500
rate -400unit
$300 per 100
(hiring and training)
June 1,000 1,100 -100 0
Cost of decreasing daily production rate $600 per unit
(layoffs) 1,850
Total units of inventory carried over from one workforce
Table 13.3 month to c
the
– o n s
nexttant= 1,850 units
Plan 1
Workforce required to produce 50 units per day = 10 workers
 Roofing Supplier Example 2
Monthly
Costs
Cost Information
Production at Calculations
Demand Inventory Ending
Month carry
Inventory
Inventory 50 Units
cost per Day Forecast
carrying $ 5Change
perunits
(= 1,850 unit per Inventory
monthx $5
carried
Jan cost per unit$9,250 900 per
1,100
Subcontracting $10unit)
per
+200unit 200
Regular-time
Feb pay rate
Average labor
900 700 (= 10
$ 5 workers
+200
per x $40
hour ($40 per
400
per day)
49,600 day x 124 days)
Mar 1,050 800 +250
$ 7 per hour 650
Overtime pay rate (above 8 hours per day)
Other
Apr costs (overtime,
1,050 1,200 -150 500
hiring, layoffs,
Labor-hours to produce a unit 1.6 hours per unit
subcontracting) 0
May
Cost 1,100
of increasing daily production 1,500
rate -400unit
$300 per 100
Total cost
(hiring and training)
June 1,000 $58,8501,100 $600 per -100 0
Cost of decreasing daily production rate unit
(layoffs) 1,850
Total units of inventory carried over from one
Table 13.3 month to the next = 1,850 units
Workforce required to produce 50 units per day = 10 workers
 Roofing Supplier Example 2
7,000 –

6,000 – Reduction
of inventory
Cumulative demand units

5,000 – Cumulative level 6,200 units

production using
average monthly
4,000 – forecast
requirements
3,000 –

2,000 – Cumulative forecast

requirements
1,000 – Excess inventory

–
Jan Feb Mar Apr May June
Figure 13.4
 Roofing Supplier Example 3
Production Demand Per Day
Month Expected Demand Days (computed)
Jan 900 22 41
Feb 700 18 39
Mar 800 21 38
Apr 1,200 21 57
May 1,500 22 68
June 1,100 20 55
6,200 124
Table 13.2
co ntra cting
b
Pla n 2 – su

Minimum requirement = 38 units per day

 Roofing Supplier Example 3
Forecast demand
Production rate per working day

70 –
Level production
60 – using lowest monthly
forecast demand
50 –

40 –

30 –

0 –
Jan Feb Mar Apr May June = Month
     
22 18 21 21 22 20 = Number of
working days
 Roofing Supplier Example 3
Cost Information
Inventory carrying cost $ 5 per unit per month
Subcontracting cost per unit $10 per unit
Average pay rate $ 5 per hour ($40 per day)
$ 7 per hour
Overtime pay rate (above 8 hours per day)
Labor-hours to produce a unit 1.6 hours per unit
Cost of increasing daily production rate $300 per unit
(hiring and training)
Cost of decreasing daily production rate $600 per unit
(layoffs)

Table 13.3
 Roofing Supplier Example 3
Cost Information
Inventory carry cost $ 5 per unit per month
In-housecost
Subcontracting production
per unit = 38
$10units per day
per unit
Average pay rate x$ 124
5 per days
hour ($40 per day)

Overtime pay rate

= 4,712 units
$ 7 per hour
(above 8 hours per day)
Subcontract
Labor-hours to produce a units
unit = 6,200 - 4,712
1.6 hours per unit

=
Cost of increasing daily production rate
(hiring and training)
1,488 units
$300 per unit

Cost of decreasing daily production rate $600 per unit

(layoffs)

Table 13.3
 Roofing Supplier Example 3
Cost Information
Inventory carry cost $ 5 per unit per month
In-housecost
Subcontracting production
per unit = 38
$10units per day
per unit
Average pay rate x$ 124
5 per days
hour ($40 per day)

Overtime pay rate

= 4,712 units
$ 7 per hour
(above 8 hours per day)
Costs Subcontract
Labor-hours to produce a units
unit = Calculations
6,200 - 4,712
1.6 hours per unit
Regular-time
Cost labor
of increasing =
daily production rate (=1,488
7.6 workers
$300 unit x $40 per
units
per
(hiring and training) $37,696 day x 124 days)
Cost of decreasing daily production rate (= $600
Subcontracting 1,488per unitx $10 per
units
(layoffs)
14,880 unit)
Table 13.3
Total cost
$52,576
 Roofing Supplier Example 4
Production Demand Per Day
Month Expected Demand Days (computed)
Jan 900 22 41
Feb 700 18 39
Mar 800 21 38
Apr 1,200 21 57
May 1,500 22 68
June 1,100 20 55
6,200 124
Table 13.2
a nd fi ring
ir i ng
Pla n3–h
Production = Expected Demand
 Roofing Supplier Example 4
Forecast demand and
Production rate per working day

monthly production
70 –

60 –

50 –

40 –

30 –

0 –
Jan Feb Mar Apr May June = Month
     
22 18 21 21 22 20 = Number of
working days
 Roofing Supplier Example 4
Cost Information
Inventory carrying cost $ 5 per unit per month
Subcontracting cost per unit $10 per unit
Average pay rate $ 5 per hour ($40 per day)
$ 7 per hour
Overtime pay rate (above 8 hours per day)
Labor-hours to produce a unit 1.6 hours per unit
Cost of increasing daily production rate $300 per unit
(hiring and training)
Cost of decreasing daily production rate $600 per unit
(layoffs)

Table 13.3
 Roofing Supplier Example 4
Cost Information Basic
Production
Cost Extra Cost$of
5 Extra
per unitCost
perofmonth
Inventory carrying cost
Daily (demand x Increasing Decreasing
Forecast Prod 1.6 hrs/unit x Production
$10 perProduction
unit
Subcontracting
Month (units) cost
Rate per unit
$5/hr) (hiring cost) (layoff cost) Total Cost
Average
Jan pay rate
900 41 $ 7,200 —
$ 5 per hour
—
($40 per day)
$
7,200
$ 7 per hour
Overtime pay
700rate39 (above
$1,200
(= 28x hours
$600) per day)
Feb 5,600 —
6,800
Labor-hours to produce a unit 1.6 hours$600
per unit
Mar 800 38 6,400 —
(= 1 x $600) 7,000
Cost of increasing daily production rate $300 per unit
$5,700
(hiring
Apr and training)
1,200
57 9,600
(= 19 x $300)
—
15,300
$3,300 $600 per unit
Cost of decreasing daily production rate
May 68 12,000 —
(layoffs)
1,500 (= 11 x $300) 15,300
$7,800
June 55 8,800 —
1,100
Table 13.3 (= 13 x $600) 16,600
$49,600 $9,000 $9,600 $68,200

Table 13.4
 Comparison of Three Plans

Cost Plan 1 Plan 2 Plan 3

Inventory carrying $ 9,250 $ 0 $ 0
Regular labor 49,600 37,696 49,600
Overtime labor 0 0 0
Hiring 0 0 9,000
Layoffs 0 0 9,600
Subcontracting 0 14,880 0
Total cost $58,850 $52,576 $68,200

Plan 2 is the lowest cost option Table 13.5

 Mathematical Approaches
 Useful for generating strategies
 Transportation Method of Linear
Programming
 Produces an optimal plan

 Management Coefficients Model

 Model built around manager’s experience and
performance

 Other Models
 Linear Decision Rule
 Simulation
 Linear Programming Method for AOP
An illustration
Cost parameters
Cr Per unit cost of regular production
Co Per unit cost of overtime production
Cs Per unit cost of sub-contracted units
Ch Per unit cost related to hiring of workers
Cl Per unit cost related to laying off workers
Ci Per unit costs related to inventory

Decision variables for the time period “t”

Rt Number of units produced in regular time
Ot Number of units produced using over time
St Number of units obtained through sub-contracting
Ht Number of additional units obtained though hiring of workers
Lt Number of units reduced through laying off workers
It Inventory during the period

Other parameters
Dt Projected Demand during the period
 K Minimum amount to be sub-contracted 0  1
Maximum allowable OT as a proportion of regular production ( )
 Linear Programming Method for AOP
An illustration…
Objective function
N
Min TC APP   C R  C O  C S
t 1
r t o t s t  C h H t  Cl Lt  Ci I t 

Subject to the constraints

Amount Produced in regular time : Rt  Rt 1  H t  Lt  t  1,2,3,..., N
Inventory Balance Equation: I t  I t 1  Rt  Ot  St   Dt  t  1,2,3,..., N

Over time constraint: Ot  Rt  t  1,2,3,..., N

Sub-contracting constraint: St  K  t  1,2,3,..., N

Non-negativity constraint: Rt , Ot , H t , Lt , S t , I t  0  t  1,2,3,..., N

 Summary of Aggregate Planning
Methods
Solution
Techniques Approaches Important Aspects
Graphical Trial and error Simple to understand and easy to
methods use. Many solutions; one chosen
may not be optimal.

Transportation method Optimization LP software available; permits

of linear programming sensitivity analysis and new
constraints; linear functions may
not be realistic.

Table 13.8
 Summary of Aggregate Planning
Methods
Solution
Techniques Approaches Important Aspects
Management Heuristic Simple, easy to implement; tries to
coefficients model mimic manager’s decision
process; uses regression.

Simulation Change Complex; may be difficult to build

parameters and for managers to understand.

Table 13.8
 Aggregate Planning in Services

Controlling the cost of labor is critical

1. Accurate scheduling of labor-hours to assure quick response to
customer demand
2. An on-call labor resource to cover unexpected demand
3. Flexibility of individual worker skills
4. Flexibility in rate of output or hours of work
 Five Service Scenarios

 Restaurants
 Smoothing the production process
 Determining the optimal workforce size
 Hospitals
 Responding to patient demand
Thank you