AGGREGATE PRODUCTION PLANNING

1. INTRODUCTION
An organisation can compete effectively only if it can deliver the required volume of
output to the customers as per their time schedule. This involves matching production
capacity with the demand and striking a balance between the two
2. PRODUCTION PLANNING SYSTEM
Business Plan. The production plan is evolved from the business plan. The
business plan is a statement of what the firm proposes to do in the future. The plan
generally spans a time horizon of 6 to 18 months. t is based on the business! strategic
goals and spells out the level of activity. The plan is generally e"pressed in terms of
annual# quarterly or monthly output $in rupee volume of sales% for the broad product
groups of the firm. t is not specific to a particular item or each product in the group. &or
e"ample# Tata 'otors! plan may specify a certain amount of rupee sales for the cars
without specifying the rupee sale for the different models of cars that it makes. t is only a
broad statement of intent.
Aggregate Production Planning. Aggregate production planning deals with the
output side of the plan. The rupee volume of sales target is translated into the number of
units of the aggregate product that must be produced and sold. The aggregate product is a
(representative! product of the product family. &or e"ample# Tata 'otors make different
models of cars like the ndica# ndigo# )afari and so on# but at the aggregate production
planning stage the target may be to produce a ten thousand (cars! in the year# where (car!
is a representative product of the car family and is assumed to consume a standard
amount of resources to help plan the capacity requirement. The aggregate plan does not
deal with specific individual products. The plan is governed by the availability of
capacity and the company!s overall policies for maintaining inventories# backorders#
employee stability or hiring and lay off policies# and subcontracting.
Aggregate Capacity Planning. The aggregate capacity plan checks whether there
is sufficient capacity to meet the demand e"pressed in the aggregate output plan. The
feasibility of the planned output is checked against the available capacity. The plan lays
down how the capacity will be utilised and how over or under capacity will be corrected
by using different strategies. *hile the basic capacity is fi"ed# in the short run it could be
augmented by overtime or running an e"tra shift or by subcontracting. The labour inputs
could be varied. The aggregate planning process balances output levels# capacity
limitations and temporary ad+ustments of capacity during the coming months. The plan
sets limits on the master production schedule.
Master Production Schedule (MPS). The master production schedule
disaggregates the product groups into individual products and lays down when these
should be produced to meet the customer!s requirements. The plan is a link between the
marketing plan and the production plan. t lays down when an incoming sales order can
be scheduled for production and when delivery of the same can be e"pected. t also takes
into account any backlogs that may e"ist and plans over,production in lean periods
keeping in view the overall policy regarding maintaining inventories.
RoughCut Capacity Planning. -ough,cut capacity planning checks the
feasibility of e"ecuting the tentative master production schedule in terms of capacity.
This is to ensure that the master production schedule does not overload any critical
department or work centre. The check is generally applied to critical areas before the
master production schedule is finalised.
Material Requirements Planning (MRP). The '.) is the driving force for
material requirements planning. The plan lays down the schedule for releasing orders and
receiving materials so that the '.) can be implemented. The other important inputs for
the '-. are the bill of materials and the inventory status.
Detailed Capacity Planning. This goes hand in hand with the '-.. t is a
detailed check carried out to ensure that the capacity needed for scheduled tasks is
available.
Shop Floor Controls. /oading# sequencing# scheduling and e"pediting are shop
floor controls. 0aily tasks or weekly tasks are coordinated through these controls.
/oading implies the assignment of individual +obs to machines or work centres.
)equencing determines the order in which tasks should be carried out so that machine
idle time and delay in completing tasks is reduced. )cheduling lays down the start and
finish time for each activity. 1"pediting monitors the material and work flow from station
to station. Any last minute ad+ustment of capacity because of delays# hold ups and change
in priorities is carried out through short term capacity control.
&ig. 12.1 .roduction .lanning and )cheduling )ystem
3. AGGREGATE PRODUCTION PLANNING
Aggregate production plan sets the production rate by product groups over a time horizon
of 6 to 18 months. t aims at an optimal combination of production rate# work force level
and inventories. The production rate is the number of units produced per unit of time. The
work force level is the number of workers needed for the production and the inventory is
the unused number of units carried over from the previous period. Aggregate production
plan attempts to minimise costs to fulfil the forecast demand by an optimal mi" of
production rate# work force level and inventory level.
.lanning
for
productio
n
1conomic
3onditions
3urrent
3apacity
.olicy on
4ack orders 5
)ub contracts
nventory
/evels
3urrent
*orkforce
1"ternal
3apacity
-aw
'aterials
Availability
3ompetitor!s
4ehaviour
'arket
0emand
EXTERNAL
FACTORS
INTERNAL
FACTORS
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BUSINESS PLAN (6 TO 18 MONTHS)
OPERATIONS PLAN
AGGREGATE
OUTPUT
AGGREGATE
CAPACITY
MPS ROUGH CUT
CAPACITY
PLAN
MRP DETAILED
CAPACITY
PLAN
LOADING
SEQUENCING
SCHEDULING
EXPEDITING
SHORT
TERM
CONTROL

BUSINESS PLAN (6 TO 18 MONTHS)
OPERATIONS PLAN
AGGREGATE
OUTPUT
AGGREGATE
CAPACITY
MPS ROUGH CUT
CAPACITY
PLAN
MRP DETAILED
CAPACITY
PLAN
LOADING
SEQUENCING
SCHEDULING
EXPEDITING
SHORT
TERM
CONTROL
&ig. 12.> nputs to the .roduction .lanning )ystem
nputs to the production planning process are shown in &ig. 12.>. The inputs
consist of internal and e"ternal factors. :enerally the e"ternal factors are beyond the
control of the planner. 9owever# some attempts are made to influence the demand. &or
instance# during lean periods discounts are offered. 9otels invariably offer discounted
packages during the lean season in order to increase demand. )imilarly# there can be a
slowdown on the promotional effort to reduce the demand. )ome organisations even
resort to making complimentary products to overcome seasonal or cyclical demand
variations. &or instance# a sports apparel store which offers swimsuits in the summer may
offer skiing gear in the winters.
All internal factors cannot be totally controlled either. 3urrent physical capacity
in terms of plant and equipment is usually fi"ed in the short run. t may not always be
feasible to ad+ust it temporarily for optimum utilisation by hiring and firing workers as
trade union rules may prohibit such a policy. )imilarly# there may be restrictions on the
overtime that can be used. ?arious strategies have to be adopted involving trade,offs
among work force levels# working hours# inventories and backlogs.
4. PRODUCTION PLANNING STRATEGIES
Chase Strategy. The production rate in this strategy is ad+usted so that the forecast
demand can be met. This is done by increasing or decreasing the level of the work force
through hiring and firing. This strategy can be adopted when a trained pool of manpower
is available for hiring as and when required. The strategy has its obvious motivational
limits. 0uring periods of low demand workers will tend to slow down as they are
apprehensive that they will be laid off as soon as the work is completed. Trade union
activity may also restrict the use of this strategy.
e!el Production Strategy. A stable work force is maintained in this strategy and
production rate is kept constant. The work force is based on the total demand for the
planning period and shortfalls are carried forward as backorders while surpluses are
carried forward as inventories. The employees prefer this strategy as they en+oy the
benefits of stable employment# though customer satisfaction is lower than what is
achieved when using the chase strategy.
Sta"le #or$%orce &aria"le #or$ 'ours. The strategy involves having a stable
work force but ad+usting the production rate by varying the work hours. )hortfalls can be
made up through working overtime and during slack periods the work force can be under
utilised.
4esides these strategies# we may even subcontract work when required. This can
be resorted to when the quality of work produced by the subcontractors is acceptable and
they are reliable. .art time workers can also be employed. &or e"ample# restaurants
employ part time workers during meal hours.
*hen a single strategy is used# it is called a pure strategy and when more than one
strategy is used it is termed as mi"ed strategy.
*hile selecting a strategy# the aim is to minimise the costs. The costs relevant to
production planning are@
Basic Production Costs. These include the direct and indirect costs of production.
The cost of materials# direct and indirect costs of labour and fi"ed costs are included. The
cost of labour includes regular and overtime wages
'iring and Firing Costs. *henever the production rate is changed by changing
the workforce level# hiring and firing costs are involved. These are the cost of hiring and
training personnel and the costs of laying off personnel.
(n!entory Carrying Costs. *henever production is in e"cess of demand# the
surplus units will have to be carried as inventory to the ne"t production period. nventory
holding cost is the cost of storage# insurance# security# safety# pilferage# obsolescence#
deterioration# and record keeping beside the cost of capital tied up in the inventory.
Bac$order Costs. *hen demand e"ceeds production# the shortfall is carried over
to the ne"t period as backorders. This involves costs of e"pediting and keeping track of
backorders and loss of customer goodwill. These are difficult to determine.
. AGGREGATE PLANNING TECHNIQUES
'ost firms use trial and error methods to solve aggregate planning problems. 0ifferent
strategies are applied and the one with the least cost selected. 'athematical techniques
namely linear programming# transportation model and dynamic programming can also be
applied to solve aggregate planning problems.
)rial and *rror Method. /et us study the method with the help of an e"ample.
*+ample
A company is setting up a production plan for its product for the ne"t si" months. The
following information is available@
D!"#$% #$% $&"'!( )* +)(,-$. %#/0 #1#-2#'2!
Aanuary &ebruary 'arch April 'ay Aune
0emand 16BB 1CBB DBB 1BBB 1>BB 18BB
7umber of
working days
>E >2 >F >B >E >F
Table 12.1 0emand and working days available
nventory carrying cost -s >.BB per unitGmonth
)tock out cost -s E.BB per unitGmonth
3ost of subcontracting -s 6B.BB per unit
3ost of hiring and training -s FBB.BB per worker
/aying off cost -s EBB.BB per worker
Time required for 1 unit E labour hours.
-egular time wage -s 1B.BB per hour
8vertime wage -s 1E.BB per hour
)tarting inventory FBB units
)afety stock >EH of monthly demand
.resent workforce FB
8vertime per worker not to e"ceed F hours per day.
The cost of material can be ignored as it is common to every unit that is produced.
Solution.
/et us try various plans as given below@
Plan ,. 3hase strategy.
Plan -. /evel .roduction. Ieep a constant work force and vary inventory and
backorders.
Plan ..6se a stable workforce sufficient to meet minimum demand and
subcontract to make up shortfalls
Plan /. 6se a stable workforce of 2B and make up shortfalls through overtime and
subcontracting.
The different plans have been set up with the help of ') 1"cel worksheets. They can
also be solved through the Aggregate .lanning module of *in<)4 package.
Plan ,
The company wishes to maintain a safety stock to cater for any variations in the
forecast and actual demand. The safety stock required to be maintained is >E H of the
monthly forecast demand. 4ased on this requirement the first step is to calculate the
actual number of units required to be produced. 0etailed working is at Table 12.>.
January February March April May June
Opening
inventory 400 400 425 225 250 300
Forecast
demand
16BB 1CBB DBB 1BBB 1>BB 18BB
Saety stoc! 400 425 225 250 300 450
"nits to be
manuactured #$00 #%25 %00 #025 #250 #&50
Table 12.> 7umber of units to be manufactured
The opening inventory in Aanuary is FBB units. The safety stock is >EH of the forecast
demand. &or Aanuary the safety stock is FBB. This also becomes the opening inventory for
the ne"t month# that is# &ebruary. The units to be manufactured are@
6nits to be manufactured J $&orecast demand K )afety stock L 8pening inventory%
Total units to be manufactured J 8>EB
Jan Feb March April May June 'otal
Opening
inventory 400 400 425 225 250 300
Forecast
demand
16BB 1CBB DBB 1BBB 1>BB 18BB
Saety stoc! 400 425 225 250 300 450
"nits to be
manuactured #$00 #%25 %00 #025 #250 #&50 (250
)umber o days 25 23 24 20 25 24
)umber o hours 200 #(4 #&2 #$0 200 #&2 ##2(
*ours re+uired (000 ($25 3500 5#25 $250 &%50 4#250
,abour re+uired 40 4% #& 33 32 5#
)umbers
Available 40
)umbers hired 0 % 0 #4 0 #& 40
)umbers ired 0 0 2( 0 # 0 2&
-ost o hiring 0 2(00 0 5$00 0 %$00 #$000
-ost o iring 0 0 #4000 0 500 0 #4500
.egular /ages (0000 ($250 35000 5#250 $2500 &%500 4#2500
0nventory cost (00 (50 450 500 $00 &00 4#00
'otal 44%#00
Table 12.2 3osts for .lan 1
Table12.2 shows all the computations. The number of days available in a month is given.
They are converted to hours by multiplying the number of days by 8 $8 hours working per
day%.
1ach unit takes E hours to produce. The total hours required for production for
each month are calculated by multiplying the numbers required to be produced in a
month by E. &or e"ample# in Aanuary we require 16BB units for which we shall need 8BBB
hours. The labour required is calculated by dividing the total number of hours required in
a month by the number of hours available per worker in the month. &or the month of
Aanuary# 8BBB hours are required for production and each worker can contribute >BB
hours in the month. 9ence the number of workers required is FB. As the present
workforce is FB# there is no requirement to hire or fire any worker. The requirement of
workers for &ebruary is FC. )even additional workers will have to be hired. The
requirements for other months have been similarly worked out.
The cost of hiring or firing workers has been calculated. t costs -s FBB to hire
and train a worker. n &ebruary# C workers have been hired and the cost is -s >8BB.
-egular wages have been calculated by multiplying the number of total hours required in
the month by the hourly wage rate which is -s 1B per hour.
The inventory cost is based on the inventory held at the end of the month.
The total cost for .lan 1 is -s F#FC#1BB.
Plan -.
The total production over si" month period is 8>EB.
The time required to manufacture 8>EB units is J(250 5 4#250 = hours.
Total hours available per worker for manufacture J 11>8
7umber of workers required
4#250
3$
##2(
= =
January February March April May June -ost
Starting inventory 400 240 1#35 34% 4&& %3&
Forecast demand
16BB 1CBB DBB 1BBB 1>BB 18BB
)umber o days 25 23 24 20 25 24
)umber o hours
per /or!er 200 #(4 #&2 #$0 200 #&2
'otal hours %200 $$24 $&#2 5%$0 %200 $&#2
,abour employed 3$ 3$ 3$ 3$ 3$ 3$
Actual production #440 #325 #3(2 ##52 #440 #3(2
0nventory 240 1#35 34% 4&& %3& 32#
Shortall #35
Shortall cost 0 $%5 0 0 0 0 $%5
.egular /ages %2000 $$250 $&#00 5%$00 %2000 $&#00 40$050
0nventory cost 4(0 $&4 &&( #4%( $42 42&2
'otal 4##0#%
Table 12.F 3osts for .lan >
Table 12.F shows the computations for .lan >. The workforce has been kept constant at
26.
Total hours per month J 7umber of days 2 8 2 26
Actual production per month J Total hours in a monthGE
nventory J 8pening inventory K production , forecast demand
7egative figure shows shortfall.
nventory at the end of si"th month should have been FEB whereas it is only 2>1.
Total cost for .lan > is -s F#11#B1C.
Plan ..
6se a stable workforce sufficient to meet minimum demand and subcontract to make up
shortfalls.
The minimum number of units to be manufacture is in 'arch J CBB units
Time required for manufacturing CBB units J CBB 2 E J2EBB hours
Time available per worker J 1D> hours
*orkforce required J 2EBBG1D> J 1D
0etailed working is at Table 12.E.

January February March April May June -osts
Starting inventory 400 400 425 225 250 300
Forecast demand
16BB 1CBB DBB 1BBB 1>BB 18BB
Saety stoc! 400 425 225 250 300 450
"nits to be
manuactured #$00 #%25 %00 #025 #250 #&50
Opening 0nventory 0 0 0 2& 0 0
)umber o days 25 23 24 20 25 24
)umber o hours 200 #(4 #&2 #$0 200 #&2
3or!orce #& #& #& #& #& #&
'otal hours
available 3(00 34&$ 3$4( 3040 3(00 3$4(
"nits produced %$0 $&& %30 $0( %$0 %30
Surplus 0 0 30 0 0 0
Shortall (40 #02$ 0 3(% 4&0 #220
Subcontracted
units (40 #02$ 0 3(% 4&0 #220
Subcontract cost 50400 $#5$0 0 23220 2&400 %3200 23%%(0
.egular /ages 3(000 34&$0 3$4(0 30400 3(000 3$4(0 2#4320
0nventory cost (00 (00 &#0 450 500 $00 40$0
'otal 45$#$0
Table 12.E 3osts for .lan 2
Total hours available per month J 7umber of days 2 8 $hours per day% 2 1D $workforce%
6nits produced J Total hours GE $E hours per unit are allowed%
)urplus Gshortfall J 6nits produced K carryover inventory L units to be produced
The shortfalls are subcontracted and costs worked out.
Total cost for .lan 2 is -s F#E>#>C8.
Plan /.
6se a stable workforce of 2B and make up shortfalls through overtime and sub,
contacting. The detailed calculations are at Table 12.6.
January February March April May June -osts
Opening 0nventory 400 0 0 252 2#2 2#2
)umber o days 25 23 24 20 25 24
)umber o hours 200 #(4 #&2 #$0 200 #&2
3or!orce 30 30 30 30 30 30
'otal hours available $000 5520 5%$0 4(00 $000 5%$0
"nits produced #200 ##04 ##52 &$0 #200 ##52
Forecast 4emand
16BB 1CBB DBB 1BBB 1>BB 18BB
Surplus 0 0 252 2#2 2#2 0
Shortall 0 5&$ 0 0 0 43$
56tra hours re+uired 0 2&(0 0 0 0 2#(0
Overtime available 3000 2%$0 2((0 2400 3000 2((0
"nits produced in
overtime 0 552 0 0 0 43$
Subcontracted units 0 44 0 0 0 0
Subcontract cost 0 2$40 0 0 0 0 2$40
.egular /ages $0000 55200 5%$00 4(000 $0000 5%$00 33(400
Overtime /ages 0 4#400 0 0 0 32%00 %4#00
0nventory cost (00 0 504 424 424 0 2#52
'otal 4#%2&2
Table 12.6 3osts for .lan F
Total hours available per month J 7umber of days 2 8 $hours per day% 2 2B $workforce%
6nits produced J Total hours GE $E hours per unit are allowed%
)urplus Gshortfall J 6nits produced K carryover inventory L forecast demand
&or making up shortfalls priority has been given to overtime. 4alance requirement if any
is sub,contracted.
Total cost for .lan F is -s F#1C#>D>
A comparison of costs is shown in Table 12.C below
-ost 7lan # 7lan 2 7lan 3 7lan 4
*iring #$000 0 0 0
,ay o #4500 0 0 0
56cess 0nventory 4#00 42&2 40$0 2#52
Shortage 0 $%5 0 0
Subcontract 0 0 23%%(0 2$40
Overtime 0 0 0 %4#00
.egular 'ime 4#2500 40$050 2#4320 33(400
'otal 44%#00 4##0#% 45$#$0 4#%2&2
Table 12.C 3omparison of costs for different plans
.lan > is the most economical option.
6. OTHER METHODS
0ynamic programming can also be used to solve aggregate planning problems as
illustrated in )upplement on 0ynamic .rogramming# 1"ample >. The capacity
requirements can also be determined through simulation. /inear 0ecision -ules can also
be used. These are a set of equations for calculating the optimal workforce# aggregate
output rate and inventory level for each period. The method guarantees an optimal
solution and incorporates non,linear cost relationships. The model determines actual
costs incurred due to changes in the workforce size# the inventory levels and the
production rate and fits them in the form of non,linear equations. The equations are
simplified through calculus to minimise the cost# and two linear equations for production
rate and work force size are obtained. /0-s must be uniquely developed by each
organisation based on its data and cannot be applied across organisations.
3. AGGREGATE PLANNING FOR SER4ICES
Aggregate planning for services is different because of the characteristics of services.
)ervices cannot be stored. &or e"ample# an airline cannot store a seat for later use. f the
seat is vacant when the flight takes off# it remains unutilised and causes a loss to the
airline. )imilarly an appointment with a dentist cannot be stored. The goods provided by
services may be stored but they generally have a short life. &or instance# a newspaper is
good only for a day.
t is difficult to predict demand for services as it varies considerably. 3apacity too
is difficult to predict and often depends on the type of services asked for by the customer.
9ow should capacity at a beauty parlour be measuredM )hould we measure it in terms of
the number of customers e"pected to visit it daily# or should we measure it in terms of the
worker hours availableM The demand for different services can considerably affect the
capacity. 8verall aggregation may not be possible.
)ervice capacity has to be provided at the appropriate place and time. This poses
its own problems. )ervices generally have a number of branches or outlets located at
different places. 0etermining the staffing requirements at each place is a part of the
aggregate planning process.
)ervices are generally labour intensive. This is an advantage from the planning
point of view as labour is the most fle"ible resource. ncreased demand can be met
through temporary and part,time workers or through overtime. 'ost services rely on
part,time workers.
*orkers can be cross,trained to perform multiple tasks. &ire fighters can be
trained as paramedics and so on. )ome services have peculiar requirements. 0octors have
to accommodate emergency calls along with their routine work. 9otels and airlines often
overbook capacity to cater for customers who do not show up after booking. The problem
is further compounded by different rates for different segments. The airline or hotel has
to determine how much capacity to provision in each segment in order to ma"imise its
profits. This process is called yield management.
8. YIELD MANAGEMENT
9otels# airlines and restaurant services are time sensitive. Their capacity lapses with time.
t is important that the capacity is fully utilised. )uch services overbook their capacity in
anticipation of no,shows $customers not turning up after booking%. 'arginal analysis is
used to determine how much of overbooking should be resorted to. The marginal analysis
is based on cost information and past data of no,shows. /et us understand the yield
process with the help of an e"ample.
Example 13.4
'anagers of the Atithi 9otel are concerned about the increasing number of guests who
book room and do not show up. They have decided to adopt a policy of overbooking like
the larger hotel chains. The profit from a guest averages -s 1BBB per night. The cost of
putting up a guest at another hotel is -s 1EBB per room per night. -ecords show the
following number of no shows for the past si" months.
N) 05)+0 F(!6&!$7/
B 8
1 1>
> >B
2 FB
F >B
9ow many rooms should they overbookM *hat will be saved by over,bookingM
Solution
The loss incurred if there is no show is -s 1BBB per night.
The cost incurred if the customers show up and the overbooked customer has to be sent to
another hotel is -s 1EBB.
f 7 be the number of customers not showing up and 4 the number of over bookings#
then a customer will have to (walk!# that is will have to be sent to another hotel if 7N4.
f the probability of 7N4 is
8 9 N B
P
<
#
then the e"pected cost of (walking! the customer J
8 9
#500
N B
P
<

.
The probability that the customer will not have to (walk!
8 9
#
N B
P
<
=
The earning from such a customer will be
9
8# 9 #000
N B
P
<

The limiting case will be when the earning and the loss are equal.
8 9 8 9
8 9
#500 8# 9 #000
#000
0:40
#500 #000
N B N B
N B
P P
P
< <
<
=
= =
+
8verbooking limit 4 .robability all guests
with reservation get a
room
8 9
#
N B
P
<

.robability that a
guest has to walk
8 9 N B
P
<
B B.BB B.BB
1 B.D> B.B8
> B.8B B.>B
2 B.6B B.FB
F B.>B B.8B
E B.BB 1.BB
As computed above# as long as the probability that a guest has to walk is not
greater than B.FB# it will be profitable to overbook rooms. &rom the table above we can
see that the if 2 rooms are overbooked the probability that a guest may have to walk is
B.FB# hence 2 rooms should be overbooked.
/et us now calculate the savings# if any.
f no over bookings are done# the e"pected number of no shows is
0 0:0( # 0:#2 2 0:20 3 0:40 4 0:20 2:52 + + + + =
/oss due to no shows 2:52 #000 2520 = = per night
7umber of no
shows
.robability 7umber of
guests who will
have to walk
1"pected value
B B.B8 2 B.>F
1 B.1> > B.>F
> B.>B 1 B.>B
2 B.FB B B
1"pected loss due to guests made to (walk! 0:$( #500 #020 = =
7umber of no
shows
.robability -ooms that will
be vacant even
after over
booking
1"pected ?alue
F B.>B 1 B.>B
1"pected loss due to vacant rooms 0:20 #000 200 = =
Total e"pected loss #020 200 #220 = + =
7et e"pected saving 2520 #220 #300 = =
The hotel should overbook three rooms. The e"pected saving is -s 12BB.
The same principle can be applied when deciding how many rooms are to be
given at what tariff. Airlines offer discounts on tickets. The airline has to take a decision
whether to accept a discounted bid on an airfare or to keep the seat for full fare.