Chapter 4

Aggregate Production Planning

Overview
Production-Planning Hierarchy
Aggregate Planning
Types of Production-Planning and Control
Systems

Wrap-Up: What World-Class Companies

Do

Production Planning Hierarchy

Long-Range Capacity Planning
Aggregate Planning
Master Production Scheduling
Production Planning and Control Systems
Pond Draining
Systems

Push
Systems

Pull
Systems

Focusing on
Bottlenecks

Types of Production-Planning
and Control Systems

Pond-Draining Systems
Push Systems
Pull Systems
Focusing on Bottlenecks

Pond-Draining Systems
Emphasis on holding inventories (reservoirs)

of materials to support production

Little information passes through the system
As the level of inventory is drawn down,
orders are placed with the supplying
operation to replenish inventory
May lead to excessive inventories and is
rather inflexible in its ability to respond to
customer needs

Push Systems
Use information about customers, suppliers, and

production to manage material flows

Flows of materials are planned and controlled by
a series of production schedules that state when
batches of each particular item should come out
of each stage of production
Can result in great reductions of raw-materials
inventories and in greater worker and process
utilization than pond-draining systems

Pull Systems
Look only at the next stage of production

and determine what is needed there, and

produce only that
Raw materials and parts are pulled from
the back of the system toward the front
where they become finished goods
Raw-material and in-process inventories
approach zero
Successful implementation requires much
preparation

Focusing on Bottlenecks
Bottleneck Operations
Impede production because they have less
capacity than upstream or downstream stages
Work arrives faster than it can be completed
Binding capacity constraints that control the
capacity of the system

Optimized Production Technology (OPT)

Wrap-Up: World-Class Practice

Push systems dominate and can be applied
to almost any type of production
Pull systems are growing in use. Most
often applied in repetitive manufacturing
Few companies focusing on bottlenecks to
plan and control production.

Why Aggregate Planning Is

Necessary
Fully load facilities and minimize overloading

and underloading
Make sure enough capacity available to satisfy
expected demand
Plan for the orderly and systematic change of
production capacity to meet the peaks and
valleys of expected customer demand
Get the most output for the amount of
resources available

Inputs
A

forecast of aggregate demand

covering the selected planning horizon
(6-18 months)
The alternative means available to
adjust short- to medium-term capacity,
to what extent each alternative could
impact capacity and the related costs
The current status of the system in
terms
of
cost
(hiring,
lay-off,
subcontract), workforce level, inventory
level and production rate

Outputs
A

production
plan:
aggregate
decisions for each period in the
planning horizon about
workforce level
inventory level
production rate

Projected costs if the production plan

was implemented

Medium-Term Capacity Adjustments

Workforce level

Hire or layoff full-time workers

Hire or layoff part-time workers
Hire or layoff contract workers

Utilization of the work force

Overtime
Idle time (undertime)
Reduce hours worked

. . . more

Medium-Term Capacity Adjustments

Inventory level
Finished goods inventory
Backorders/lost sales

Subcontract

Pure Strategies for the Informal

Approach

Matching Demand
Level Capacity

Buffering with inventory

Buffering with overtime or subcontracting

Matching Demand Strategy

Capacity (Production) in each time period is varied to
exactly match the forecasted aggregate demand in that
time period
Capacity is varied by changing the workforce level
(Strategy 3)
Finished-goods inventories are minimal
Labor and materials costs tend to be high due to the
frequent changes

Developing and Evaluating

the Matching Production Plan

Production rate is dictated by the forecasted

aggregate demand
Convert the forecasted aggregate demand into the
required workforce level using production time
information
The primary costs of this strategy are the costs of
changing workforce levels from period to period,
i.e., hirings and layoffs

Level Capacity Strategy

Capacity (production rate) is held level

(constant) over the planning horizon

The difference between the constant
production rate and the demand rate is made
up (buffered) by inventory (strategy 1),
overtime (strategy 2), and/or subcontracting
(strategy 4)

Developing and Evaluating

the Level Production Plan

Assume that the amount produced each period

is constant
The gap between the amount planned to be
produced and the forecasted demand is filled
with either inventory, overtime, idle time,
subcontracting
. . . more

Developing and Evaluating

the Level Production Plan
The primary costs of this strategy are
inventory carrying costs, overtime
costs, subcontract cost etc
Period-ending inventories are
determined using the inventory
balance equation:
Pi = Di + (Ii Ii-1 ) (i = 1,2,3,,n)

Decision Processes for Aggregate

Planning
Informal or Trial-and-Error Approach
Mathematically Optimal Approaches
Linear Programming
Linear Decision Rules

Computer Search Method

Heuristics

Graphic Methods

1.
2.
3.
4.
5.
6.
7.

3 6

 1
(Level Production)

..
..
..
..
..
..
..
..
..
..
..
..

22
20
23
19
22
22
20
23
11
22
22
18

5000
3700
4000
5300
7400
9300
11600
8400
6000
6000
4800
5000

244

76500

 1
50 //
= 3147.6 x 50 = 157,380

= 7738 x 25 = 193,450

= 350,830

6699.6

= 6699.6 x 50 = 334,980

 2

0 65
66 171

172 182
183 226
227 249

230 /
406 / (
120 230 /
350 /
56 /)
350 / ()
230 / ( 120
350 /
230 /)
253 / (
23 /)

 2
10 /
50 //
200 / 1
() 6350 x 10 = 63,500

2356.4 x 50 = 117,820

240 x 200 = 48,000

2
= 229,320

 3
0 84
85 128
129 148
149 171
172 182
183 204
205 244

250 /
350 / ( 100
250 / 350 /)
410 / ( 60 /
1700 )
370 / ( 20 /
)
410 / ( 60 /
) 1380 )
273 / ( 100
350 / 250 /
23 /)
250 /

 3
10 /
50 //
200 / 1
()
2826 x 10 = 28,260

1301.4 x 50 = 65,070

200 x 200 = 40,000

() 3080 x 15 = 46,200
3
= 179,530

1.
2.

4.9
(Cumulative Graphs)

( + )
-

4.10
(Cost comparison)
1.
-
-
2.

-
-
- -

 1
- 314 /
- 17%
-

(
)

= 3,552 x 10 = 35,520

= 3,526.73 x 50 = 176,336.5

= 211,856.5
(
= 3,668 x 30 = 110,040 )

= 6,340 x 10 = 63,400

= 1,539.02 x 50 = 76,951

= 240 x 200 = 48,000

= 188,351

= 5,023 x 10 = 50,230

= 1,470.83 x 50 = 73,541.5

= 200 x 200 = 40,000

= 877 x 15 = 13,155

= 176,926.5