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Aggregate Planning

The concept of aggregation Chase and level approaches LP approach Master Scheduling Summary Reading: Page 600 625

Learning Objectives
Explain what aggregate planning is and how it is useful. Identify the variables decision makers have to work with in aggregate planning and some of the possible strategies they can use. Describe some of the graphical and quantitative techniques planners use. Prepare aggregate plans and compute their costs.

Planning Horizon
Aggregate planning: Intermediate-range
capacity planning, usually covering 2 to 12 (18) months.
Long range Intermediate range

Short range Now

2 months

1 Year

Overview of Planning Levels

Short-range plans (Detailed plans)
Machine loading Job assignments

Intermediate plans (General levels)

Employment Output

Long-range plans
Long term capacity Location / layout

Process Planning Longrange Intermediaterange Manufacturing Strategic Capacity Planning Aggregate Planning Services

Master Production Scheduling Material Requirements Planning Order Scheduling Shortrange Weekly Workforce & Customer Scheduling Daily Workforce & Customer Scheduling

The Concept of Aggregation

Given the demand forecast Ft for each period t in the planning horizon that extends over T periods, determine the production level Pt, inventory level It, and work force Wt for periods t=1,2,,T that minimizes the relevant costs over the planning horizon. Aggregate planning is essentially a big picture approach to planning: try to avoid focusing on individual products or services.

Example: An Aggregation Unit

A plant produces six models of washing machines. Model number A5532 K4242 L9898 L3800 M2624 M3880 Reqd worker-hours % Total no. sold 4.2 32 4.9 21 5.1 17 5.2 14 5.4 10 5.8 6

An aggregate unit is a fictitious washing machine requiring (.32)(4.2)+(.21)(4.9)+(.17)(5.1)+(.14)(5.2)+(.10)(5.4)+(0.06)(5. 8) = 4.86 labor hours.

Aggregate Planning
Begin with forecast of aggregate demand Forecast intermediate range General plan to meet demand by setting
Output levels Employment Finished goods inventory level

Production plan is the output of aggregate planning Update plan periodically rolling planning horizon always covers the next 12 18 months

Aggregate Planning Inputs

Workforce Facilities

Inventory carrying Back orders Hiring/firing Overtime Inventory changes Subcontracting

Demand forecast Policies

Subcontracting Overtime Inventory levels Back orders

Aggregate Planning Outputs

Total cost of a plan Projected levels of inventory
Inventory Output Employment Subcontracting Backordering

Aggregate Planning Strategies

Alter demand to match capacity

Alter capacity to match demand

Some of each

Demand Options
Pricing Promotion Back orders New demand

Capacity Options
Hire and layoff workers Overtime/slack time Part-time workers Inventories Subcontracting

Aggregate Planning Strategies

Maintain a level workforce Maintain a steady output rate Match demand period by period Use a combination of decision variables

Basic Strategies
Level capacity strategy:
Maintaining a steady rate of regulartime output while meeting variations in demand by a combination of options.

Chase demand strategy:

Matching capacity to demand; the planned output for a period is set at the expected demand for that period.

Chase Approach
Investment in inventory is low Labor utilization in high

The cost of adjusting output rates and/or workforce levels

Level Approach
Stable output rates and workforce

Greater inventory costs Increased overtime and idle time Resource utilizations vary over time

Techniques for Aggregate Planning

1. Determine demand for each period 2. Determine capacities for each period 3. Identify policies that are pertinent 4. Determine units costs 5. Develop alternative plans and costs 6. Select the best plan that satisfies objectives. Otherwise return to step 5.

Average Inventory
In practice, we may use either ending inventory criteria or average inventory level criteria
Average Beginning Inventory + Ending Inventory = inventory 2

Example 1
Suppose we have the following unit demand and cost information:
Demand/mo Jan 200 Feb 200 Mar 300 Apr 400 May 500 Jun 200 Total 1,800

Cost Output Regular time: Over time: Subcontract: Inventory Back orders:

$2 per unit $3 per unit $6 per unit $1 per unit per month $5 per unit per period

Suppose the initial inventory is 0. Assuming a level of output rate of 300 units per month with regular time, what is the total cost?

Period Demand Output Regular Overtime subcontract Output-demand Inventory Beginning Ending Average Backorder Cost

Jan 200 300 100 0 100 50 0 650

Feb 200 300 100 100 200 150 0 750

Mar 300 300 0 200 200 200 0 800

Apr 400 300 -100 200 100 150 0 750

May 500 300 -200 100 0 50 100 1,150

Jun 200 300 100 0 0 0 0 600

Total 1,800 1,800 0



Example 2
For the previous example, the company just learned that one person is going to retire. Rather than replace that person, the company would like to stay with the smaller workforce and use overtime to make up for the lost output. The reduced regulartime output is 280 units per month. The maximum amount of overtime output per period is 40 units. Develop a plan and compare it to the previous one.


Period Demand Output Regular Overtime subcontract Output-demand Inventory Beginning Ending Average Backorder Cost

Jan 200 280 0 80 0 80 40 0 600

Feb 200 280 0 80 80 160 120 0 680

Mar 300 280 40 20 160 180 170 0 850

Apr 400 280 40 -80 180 100 140 0 820

May 500 280 40 -180 100 0 50 80 1,130

Jun 200 280 0 80 0 0 0 0 560

Total 1,800 1,680 120

80 $4,640


Example 3
See the Excel file We assume: no overtime, no subcontracting, we may layoff or hire workers in each period; we consider two scenarios; backorder is allowed and not allowed

Mathematical Techniques
Linear programming: Methods for obtaining optimal solutions to problems involving allocation of scarce resources in terms of cost minimization. Simulation models: Computerized models that can be tested under different scenarios to problems.

LP Approach: an Example
Suppose no firing, no hiring

Summary of Planning Techniques


Heuristic (trial and error)

Intuitively appealing, easy to understand; solution not necessarily optimal. Computerized; linear assumptions not always valid. Computerized models can be examined under a variety of conditions.

Linear programming Simulation


Heuristic (trial and error)

Aggregate Planning in Services

Services occur when they are rendered Demand for service can be difficult to predict Capacity availability can be difficult to predict Labor flexibility can be an advantage in services

Aggregate Plan to Master Schedule

Aggregate Planning


Master Schedule

Disaggregating the Aggregate Plan

Master schedule: The result of disaggregating an aggregate plan; shows quantity and timing of specific end items for a scheduled horizon. Rough-cut capacity planning: Approximate balancing of capacity and demand to test the feasibility of a master schedule.

Master Scheduling
Master schedule
Determines quantities needed to meet demand Interfaces with
Marketing Capacity planning Production planning Distribution planning

Master Scheduler
Evaluates impact of new orders Provides delivery dates for orders Deals with problems
Production delays Revising master schedule Insufficient capacity

Master Scheduling Process

Beginning inventory Forecast Customer orders

Projected inventory

Master Scheduling

Master production schedule Uncommitted inventory

Projected On-hand Inventory

Projected on-hand = inventory

Inventory from previous week

Current weeks requirements

Projected On-hand Inventory

Beginning Inventory

64 Forecast Customer Orders (committed) Projected on-hand inventory

Customer orders are larger than forecast in week 1

1 30 33 31

JUNE 2 3 30 30 20 1 10 -29

4 30 4

5 40 2

JULY 6 7 40 40

8 40

Forecast is larger than Customer orders in week 3

Forecast is larger than Customer orders in week 2


Review Problems
Problems 1, 5, 8, 13, 15 at page 628 to 631 (use average inventory level to count inventory holding cost when this cost is involved) Problems 21, 22 at page 631