Aggregate Planning

Definition:
The process of planning the quantity and timing of output over the
intermediate range by adjusting the production rate, employment, inventory and
other controllable variables.
Production planning in the intermediate range of time is termed as
Aggregate planning. It is thus called because the demand on facilities and
available capacities is specified in aggregate quantities.
Ex Aggregate quantities of no of vehicles.
Aggregate no of soaps.
In production the planning process is normally derived in three categories.
!. "ong range planning deals #ith strategic decisions such as purchase of
facilities, introduction of ne# products, process etc$
%. &hort term planning deals #ith day to day #or', scheduling and some
times inventory problems.
(. intermediate planning or Aggregate planning
) It considers load on hand and the facilities available.
) It enables the management to formulate a general strategy by #hich
capacity can be made to satisfy demand in a most economical #ay.
) It is made operatimal through a master schedule that gives the
manufacturing schedule.
The follo#ing diagram sho#s aggregate planning and its relationship #ith other
planning
*ig +elation ship b,# facility planning ,aggregate
planning - &cheduling
Time
Forecast
Demand
schedule
Factory
Factory
ware house
Shafting
facility &jobs
Here/why
off workers
Facility
decision
Aggregate
plan
Schedule
Facility decision
Aggregate planning
Scheduling
Aggregate
schedule
for period
Aggregate
planning Market
nformation
Master
schedule
Material
procurement
!aw material
"endor
Properties of Aggregate planning
) .oth output and scales should be expressed in a logical overall unit
of measuring
) Acceptable forecast for some reasonable planning period ,say one
year.
) A method of identification and fixing the relevant costs associated
#ith the plant .
) Availability of alternatives for meeting the objective of organisation.
) Ability to construct a model that #ill permit to ta'e optimal or near
optimal decisions for sequence of planning periods in the planning
hori/on.
) *acilities that are considered fixed to carry out objective.
0ecision options in Aggregate planning
&ome time the demand for the product forecasts made is very much less than
the normal available capacity or the forecasts may be very higher than that
available capacity. That is #hy decision options are made available to modify
demand or supply. The decision options are
!. The decisions that modify the demand for products and services.
%. The decisions that modify the supply of product and services to
match the demand.
1odification of demand
!. 0ifferential pricing
a. &upply 2demand discounts are offered off)season rates.
b. 0emand2supply to reduce the demand differential prices are fixed
%. Advertising and &ales promotion
(. .ac'logs
a. 1anufacturer can create the bac'logs and request the customer to
#ait for delivery.
3. 0evelopment of complementary products
1odification of supply
!. 4iring and lay)off of employees.
%. over time and under time
(. 5se of part) time or temporary labour.
3. &ub contracting.
6. 7arrying inventory.
The production manager can select any of the above discussed strategies
but a combination rather than a single strategy, #ill result in most economical
manner.
*ocussed Aggregate Planning &trategies
!. 8ary production to match demand9chase demand strategy:
4iring and lay of #or'ers.
5se of over time.
&ub contracting.
;o accumulation of inventory.
%. Production at a constant rate9level production strategy:
o &table #or' force producing at a constant output rate.
o Inventory may be accumulated to satisfy pea' demands
o sub contracting is allo#ed.
o .atch orders can be accepted.
o Promotional programs may also be used to shift the demand.
o If there #ere shortages, some batch orders could be allo#ed
under a level production.
(. Production #ith stable #or' force9stable #or' force strategy:
+etaining the stable #or' force, it permits
<ver time
Part time -
Idle time
&ome times bac' orders may also be allo#ed
&ub contracting -
5se of inventories
period
Aggregate Planning methods
!. =raphical and charting technique
7onstruct simple tables and graphs that enable the management to
compare and contrast forecasted demand #ith existing capacity.
*irst thing one has to do is to construct a cumulative production
requirement chart for the planning period.
Then the production manage has available capacity on one hand and
the fluctuating demand on the other .4e tries to fulfill the demand by various
combinations of #or'force, over time,under time, sub contracting and
inventory maintenance and so on.
%. Aggregate Planning by linear programming
It has dealt #ith simple linear programming model based on
transportation model to solve aggregate planning problem.
3. Aggregate planning by mathematical techniques
It is vie#ed as one that of allocating capacity 9supply: to meet
forecast 9demand: requirement. &olved in a linear programming format
transportation method can be used to solve the problem.
&upply Inventory on hand and units produced through
+egular time 9+T:
<ver time 9<T:
&ub contract 9&7:
0emand monthly requirement > any desired ending inventory.
7osts associated production costs and carrying costs
Transportations linear programming approach used to include
bac' order costs.
Production in a later month can be allocated to supply a bac' ordered
demand from an earlier month at #hatever stoc'out cost premium the firm chooses
to assign.
"inear decision rule 94mms rule:
1r.4olt, 1r. 1odigliani, 1r.1uth of 7arregie Institute of Technology has
developed a special type of mathematical technique 'no#n as linear decisions to
solve production planning problem.
It deals #ith quadratic cost function for the organisation #ith cost
components such as regular pay roll, #ring and lay off costs, over time cost and
inventory carrying cost.
The model in its limitations started #ith t#o sets of decision variables i.e
#or' force and production rate, because of its complexity, the production rate, as a
set of decision variable through the inventory balance equation.
"et us explore the problem of setting the aggregate production rate and si/e
of the #or' force. ?e describe the particular format that this problem assumes in a
factory operated by a cooperating company, addressing the various types of costs
and intangible penalties that are relevant in mar'ing the decision. Then #e present
the solution in the form of the decision rule that is optional for the type of decision
criterion used.
In deciding upon the production rate and the #or' force of a factory there
are three important aspects that contribute sufficient complexity rendering the
problem a formidable one
) 4o# should production and employment be adjusted to fluetuations
in the orders received@
) ?hat provisions should be made for errors in the forecasts or future
orders@
) ?hat are the implications of the fact that the current decision is but
one of a sequence to be made at successive points of fine.
The alternatives for responding to fluctuation in order
) maintenance of constant production rate by hiring #or' force in
Precise adjustment #ith order fluctuations.
) 1aintenance of constant #or' force adjusting production
rate to orders by #or'ing overtime or under time accordingly.
) maintenance of a constant #or' force and constant production rate,
allo#ing inventories and order bac'logs to fluctuate.
7osts involved in planning production and employment
The decision ma'er problem may be a problem of determining a maximum
9or minimum: of same criterion. In order to apply the method all costs A even
though some are intangible A are reduce to quantitative forms and expressed in
comparable units.
!. +egular Pay roll costs
?hen order fluctuations are absorbed by increasing and decreasing
the #or' force, regular pay roll costs are affected. The si/e of the #or' force Is
adjusted once a month and setting the #or' force at a certain level implies a
commitment to pay the employees their regular time #ages for a month
+egular payroll cost B #$ #
c w c
t
+

t
w B si/e of #or' force
#$
c
is not changed by scheduling decision and hence is irrelevant to them so
such a fixed cost term shall be ignored .4o# ever the irrevelant cost
component 9 #$
c
: should al#ays be introduced if quadratic fit #ill be improved
by doing so.
%. 4iring and lay)off costs
The costs of hiring and training people rises #ith the number hired cost
The cost of laying A off #or'ers arises from terminal pay, reorgani/ation etc.
The cost incurred in each month depends on the charges in the si/e of the
#or' force b,# successive months. &ince these costs increase both #ith increase
and decrease in he #or' force, the quadratic cure represented by the follo#ing
equation in a suitable first approximation.
7ost of hiring and lay off B
%
## # %
& ' c w w c
t t



It is not required that these costs be symmetrical
cost
4iring and *iring cost
(.<ver time costs
If order fluctuates are absorbed increasing and decreasing production
rate #ithout changing the #or' force, then overtime and idle time costs are
incurred .over time involves #age payment at an hourly rate that usually is fifty
percent higher than regular time. Idle time is #aste of labour time that is paid
for in the regular pay roll, but is not used for productive activities.
The costs of over time depend upon t#o decision variables, the si/e of
the #or' force # and the aggregate production rate p.

Production rate, p
?ith the given #or' force # and average #or'er productivity ', the
expression '# is the maximum no of units that can be produced #ithout any
overtime.
The quadratic curve that approximates the relation b,# the expected
cost of overtime for a given #or' force of si/e t
w
and different production rates
t
p
is given by the equation
Expected cost of over time B t t t t t t
w p c w c p c w c p c
#% ( )
%
* $
& ' + +
Production rate p
&moothed overtime cost
As production t
p
exceeds t
w c
* ) a level set by the si/e of #or' force
A overtime cost increases other terms may be added to improve the approximation.
Inventory bac' order and m,c set up cost
?hen order fluctuations are absorbed by inventory and bac' order
fluctuations, other costs are incurred
To have a simple relation b,# a monthCs production and the inventory
at the end of the month, it is convenient to use the variable, net inventory, defined
as inventory is defined as inventory minus bac' orders. ;et inventory is increased
by production, regardless of #hether the product is added to physical inventory or
ripped out to decrease the no of bac' orders.
The relationship b,# optimal net inventory and aggregate order rate
may be approximated over a range by a function of the form
<ptimal net inventory B t
s c c
+ ,
+
?here t
s
B Aggregate order rate
?hen actual net inventory deviates from the optimal net inventory, in either
direction costs rises as sho#n in fig given belo#. If the net inventory falls belo# the
optimal level, then the si/e of safety stoc' and batch si/e of individual products
must be reduced. A similar cost calculated can be made for the situations in #hich
net inventory is above the optimal level. <ver a range, the cost curve may be
approximated adequately by a quadratic in #hich the cost rises as the square of
the level. The quadratic is expresses as
Expected inventory, bac' order and set up costs B
%
+ ,
&- ' .
t t
s c c I +
?here
t
I
B net inventory
t
S
B order rate net inventory
4euristic 1ethods
These methods are thumb rule methods. They do not give optimal
solution but generally provide a #or'able solution for planning the production.
!. 1anagement 7oefficient 1ethod.
%. &earch 0ecision +ule.
1anagement 7oefficient 1ethod
0eveloped by .o#man.
Incorporates managements past decisions for improving
present decision.
It involves statistical analysis of managements past decisions.
Assumptions
1anagement is quite a#are of sensitive to the criteria of the
&ystem.
1any a times the manager may not explain the reason for any
decision being ta'en.
After seeing and experiencing no of instances, the decision
can be made sub consciously.
.o#manCs theory statement
It states that the managementCs performance is considerably improved
upon by applying a set of decision rules consistently.
+eason
<ne of the reasons that a set of decision rules #ill yield better results is
due to the fact that most of the cost functions are shallo# and dish shaped at the
bottom and any decision that is slightly deviated from the optimal decision does not
change the cost criteria drastically from the value that corresponds to the optimum
solution.
.o#man in his model developed a procedure in #hich a multiple regression
analysis of managements past behaviour on a particular decision set is performed.
The coefficient so derived can be used to indicate any future decision of
such type.
The decision, it is expected, #ill still have some amount of business but
the variance can be minimi/ed.
&earch 0ecision +ule
This model ta'es into t#o linear feed Dbac' decision rules
!. ?or' force si/e it includes t#o parameters
?or' force charges.
<ver time.
%. Production rate it also includes t#o parameters
.ac' orders.
Inventory.
These four parameters in various combinations may generate numerous
alternatives.
A 4ueristic search procedure is used to get the values of four parameters
that can result the min cost of operation.
There are other &0+ models developed by Eones and Tauberi
Eones 1odel
It is a parametric production planning model in #hich the parameters
for four cost functions are assumed to be quadratic in nature.
Tauberis 1odel
It assumes cost functions either quadratic or other mathematical
expressions. In this one cost functions are ta'en as best estimates of actuals.
Another 1odel is developed by 8irgin
It uses simulation approach #here cost functions can be ta'en as
linear , quadratic or step functions.