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Home(/index.html) / EncyclopediaofM / ABud(index.html) / AggregatePlanning

AGGREGATEPLANNING
Aggregateplanningistheprocessofdeveloping,analyzing,andmaintainingapreliminary,
approximatescheduleoftheoveralloperationsofanorganization.Theaggregateplangenerally
containstargetedsalesforecasts,productionlevels,inventorylevels,andcustomerbacklogs.
Thisscheduleisintendedtosatisfythedemandforecastataminimumcost.Properlydone,
aggregateplanningshouldminimizetheeffectsofshortsighted,daytodayscheduling,inwhich
smallamountsofmaterialmaybeorderedoneweek,withanaccompanyinglayoff
(/knowledge/Layoff.html)ofworkers,followedbyorderinglargeramountsandrehiringworkers
thenextweek.Thislongertermperspectiveonresourceusecanhelpminimizeshortterm
requirementschangeswitharesultingcostsavings.
Insimpleterms,aggregateplanningisanattempttobalancecapacityanddemandinsucha
waythatcostsareminimized.Theterm"aggregate"isusedbecauseplanningatthislevel
includesallresources"intheaggregate"forexample,asaproductlineorfamily.Aggregate
resourcescouldbetotalnumberofworkers,hoursofmachinetime,ortonsofrawmaterials.
Aggregateunitsofoutputcouldincludegallons,feet,poundsofoutput,aswellasaggregate
unitsappearinginserviceindustriessuchashoursofservicedelivered,numberofpatients
seen,etc.
Aggregateplanningdoesnotdistinguishamongsizes,colors,features,andsoforth.For
example,withautomobilemanufacturing,aggregateplanningwouldconsiderthetotalnumberof
carsplannedfornottheindividualmodels,colors,oroptions.Whenunitsofaggregationare
difficulttodetermine(forexample,whenthevariationinoutputisextreme)equivalentunitsare
usuallydetermined.Theseequivalentunitscouldbebasedonvalue,cost,workerhours,or
somesimilarmeasure.
Aggregateplanningisconsideredtobeintermediateterm(asopposedtolongorshortterm)in
nature.Hence,mostaggregateplanscoveraperiodofthreeto18months.Aggregateplans
serveasafoundationforfutureshortrangetypeplanning,suchasproductionscheduling,
sequencing,andloading.Themasterproductionschedule(MPS)usedinmaterialrequirements
planning(MRP)hasbeendescribedastheaggregateplan"disaggregated."
Stepstakentoproduceanaggregateplanbeginwiththedeterminationofdemandandthe
determinationofcurrentcapacity.Capacityisexpressedastotalnumberofunitspertimeperiod
thatcanbeproduced(thisrequiresthatanaveragenumberofunitsbecomputedsincethetotal
mayincludeaproductmixutilizingdistinctlydifferentproductiontimes).Demandisexpressedas

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totalnumberofunitsneeded.Ifthetwoarenotinbalance(equal),thefirmmustdecidewhether
toincreaseordecreasecapacitytomeetdemandorincreaseordecreasedemandtomeet
capacity.Inordertoaccomplishthis,anumberofoptionsareavailable.
Optionsforsituationsinwhichdemandneedstobeincreasedinordertomatchcapacityinclude:
1. Pricing.Varyingpricingtoincreasedemandinperiodswhendemandislessthanpeak.
Forexample,matineepricesformovietheaters,offseasonratesforhotels,weekendrates
fortelephoneservice,andpricingforitemsthatexperienceseasonaldemand.
2. Promotion.Advertising,directmarketing,andotherformsofpromotionareusedtoshift
demand.
3. Backordering.Bypostponingdeliveryoncurrentordersdemandisshiftedtoperiodwhen
capacityisnotfullyutilized.Thisisreallyjustaformofsmoothingdemand.Service
industriesareabletosmoothdemandbytakingreservationsorbymakingappointmentsin
anattempttoavoidwalkincustomers.Somerefertothisas"partitioning"demand.
4. Newdemandcreation.Anew,butcomplementarydemandiscreatedforaproductor
service.Whenrestaurantcustomershavetowait,theyarefrequentlydivertedintoa
complementary(butnotcomplimentary)service,thebar.Otherexamplesincludethe
additionofvideoarcadeswithinmovietheaters,andtheexpansionofservicesat
conveniencestores.
Optionswhichcanbeusedtoincreaseordecreasecapacitytomatchcurrentdemandinclude:
1. Hire/layoff.Byhiringadditionalworkersasneededorbylayingoffworkersnotcurrently
requiredtomeetdemand,firmscanmaintainabalancebetweencapacityanddemand.
2. Overtime.Byaskingorrequiringworkerstoworkextrahoursadayoranextradayper
week,firmscancreateatemporaryincreaseincapacitywithouttheaddedexpenseof
hiringadditionalworkers.
3. Parttimeorcasuallabor.Byutilizingtemporaryworkersorcasuallabor(workerswho
areconsideredpermanentbutonlyworkwhenneeded,onanoncallbasis,andtypically
withoutthebenefitsgiventofulltimeworkers).
4. Inventory.Finishedgoodsinventorycanbebuiltupinperiodsofslackdemandandthen
usedtofilldemandduringperiodsofhighdemand.Inthiswaynonewworkershavetobe
hired,notemporaryorcasuallaborisneeded,andnoovertimeisincurred.
5. Subcontracting.Frequentlyfirmschoosetoallowanothermanufacturerorservice
providertoprovidetheproductorservicetothesubcontractingfirm'scustomers.By
subcontractingworktoanalternativesource,additionalcapacityistemporarilyobtained.
6. Crosstraining.Crosstrainedemployeesmaybeabletoperformtasksinseveral
operations,creatingsomeflexibilitywhenschedulingcapacity.
7. Othermethods.Whilevaryingworkforcesizeandutilization,inventory
buildup/backlogging,andsubcontractingarewellknownalternatives,thereareother,more
novelwaysthatfinduseinindustry.Amongtheseoptionsaresharingemployeeswith
countercyclicalcompaniesandattemptingtofindinterestingandmeaningfulprojectsfor
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employeestododuringslacktimes.

AGGREGATEPLANNINGSTRATEGIES
Therearetwopureplanningstrategiesavailabletotheaggregateplanner:alevelstrategyanda
chasestrategy.Firmsmaychoosetoutilizeoneofthepurestrategiesinisolation,ortheymay
optforastrategythatcombinesthetwo.

LEVELSTRATEGY.
Alevelstrategyseekstoproduceanaggregateplanthatmaintainsasteadyproductionrate
and/orasteadyemploymentlevel.Inordertosatisfychangesincustomerdemand,thefirm
mustraiseorlowerinventorylevelsinanticipationofincreasedordecreasedlevelsofforecast
demand.Thefirmmaintainsalevelworkforceandasteadyrateofoutputwhendemandis
somewhatlow.Thisallowsthefirmtoestablishhigherinventorylevelsthanarecurrently
needed.Asdemandincreases,thefirmisabletocontinueasteadyproductionrate/steady
employmentlevel,whileallowingtheinventorysurplustoabsorbtheincreaseddemand.
Asecondalternativewouldbetouseabacklogorbackorder.Abackorderissimplyapromiseto
delivertheproductatalaterdatewhenitismorereadilyavailable,usuallywhencapacitybegins
tocatchupwithdiminishingdemand.Inessence,thebackorderisadeviceformovingdemand
fromoneperiodtoanother,preferablyoneinwhichdemandislower,therebysmoothing
demandrequirementsovertime.
Alevelstrategyallowsafirmtomaintainaconstantlevelofoutputandstillmeetdemand.Thisis
desirablefromanemployeerelationsstandpoint.Negativeresultsofthelevelstrategywould
includethecostofexcessinventory,subcontractingorovertimecosts,andbackordercosts,
whichtypicallyarethecostofexpeditingordersandthelossofcustomergoodwill.

CHASESTRATEGY.
Achasestrategyimpliesmatchingdemandandcapacityperiodbyperiod.Thiscouldresultina
considerableamountofhiring,firingorlayingoffofemployeesinsecureandunhappy
employeesincreasedinventorycarryingcostsproblemswithlaborunionsanderraticutilization
ofplantandequipment.Italsoimpliesagreatdealofflexibilityonthefirm'spart.Themajor
advantageofachasestrategyisthatitallowsinventorytobeheldtothelowestlevelpossible,
andforsomefirmsthisisaconsiderablesavings.Mostfirmsembracingthejustintime
productionconceptutilizeachasestrategyapproachtoaggregateplanning.
Mostfirmsfinditadvantageoustoutilizeacombinationofthelevelandchasestrategy.A
combinationstrategy(sometimescalledahybridormixedstrategy)canbefoundtobettermeet
organizationalgoalsandpoliciesandachievelowercoststhaneitherofthepurestrategiesused
independently.

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TECHNIQUESFORAGGREGATE
PLANNING
Techniquesforaggregateplanningrangefrominformaltrialanderrorapproaches,whichusually
utilizesimpletablesorgraphs,tomoreformalizedandadvancedmathematical
(/knowledge/Mathematics.html)techniques.WilliamStevenson'stextbookProduction/Operations
Managementcontainsaninformalbutusefultrialanderrorprocessforaggregateplanning
presentedinoutlineform.Thisgeneralprocedureconsistsofthefollowingsteps:
1. Determinedemandforeachperiod.
2. Determinecapacityforeachperiod.Thiscapacityshouldmatchdemand,whichmeansit
mayrequiretheinclusionofovertimeorsubcontracting.
3. Identifycompany,departmental,orunionpoliciesthatarepertinent.Forexample,
maintainingacertainsafetystocklevel,maintainingareasonablystableworkforce,
backorderpolicies,overtimepolicies,inventorylevelpolicies,andotherlessexplicitrules
suchasthenatureofemploymentwiththeindividualindustry,thepossibilityofabad
image,andthelossofgoodwill.
4. Determineunitcostsforunitsproduced.Thesecoststypicallyincludethebasicproduction
costs(fixedandvariablecostsaswellasdirectandindirectlaborcosts).Alsoincludedare
thecostsassociatedwithmakingchangesincapacity.Inventoryholdingcostsmustalso
beconsidered,asshouldstorage,insurance,taxes,spoilage,andobsolescence
(/knowledge/Obsolescence.html)costs.Finally,backordercostsmustbecomputed.While
difficulttomeasure,thisgenerallyincludesexpeditingcosts,lossofcustomergoodwill,and
revenuelossfromcancelledorders.
5. Developalternativeplansandcomputethecostforeach.
6. Ifsatisfactoryplansemerge,selecttheonethatbestsatisfiesobjectives.Frequently,thisis
theplanwiththeleastcost.Otherwise,returntostep5.
AnexampleofacompletedinformalaggregateplancanbeseeninFigure1.Thisplanisan
exampleofaplandeterminedutilizingalevelstrategy.Noticethatemploymentlevelsandoutput
levelsremainconstantwhileinventoryisallowedtobuildupinearlierperiodsonlytobedrawn
backdowninlaterperiodsasdemandincreases.Also,notethatbackordersareutilizedinorder
toavoidovertimeorsubcontracting.Thecomputedcostsfortheindividualvariablesoftheplan
areasfollows:

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Outputcosts:
Regulartime=$5perunit
Overtime=$8perunit
Subcontracted=$12perunit
Othercosts:
Inventorycarryingcost=$3perunitperperiodappliedtoaverageinventory
Backorders=$10perunitperperiod
Costofaggregateplanutilizingalevelstrategy:
Outputcosts:
Regulartime=$51,500=$7,500
Overtime=$80=0
Subcontracted=$100=0
Othercosts:
Inventorycarryingcost=$3850=$2,400
Backorders=$10100=$1,000
Totalcost=$10,900
Asecondexample,showninFigure2,presentsthesamescenarioasinFigure1but
demonstratestheuseofacombinationstrategy(i.e.,acombinationoflevelandchase)tomeet
demandandseektominimizecosts.Forthisexample,let'sassumethatcompany

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Figure1

policypreventsusfromutilizingbackordersandlimitsourplantonomorethan50unitsof
overtimeperperiod.Noticethattheregularoutputlevelisconstant,implyingalevelworkforce,
whileovertimeandsubcontractingareusedtomeetdemandonaperiodbyperiodbasis(chase
strategy).Onewillnoticethatthecostofthecombinationplanisslightlylowerthanthecostof
thelevelplan.

Outputcosts:
Regulartime=$51,200=$6,000
Overtime=$8100=800
Subcontracted=$12250=2,500
Othercosts:
Inventorycarryingcost=$3325=975
Backorders=$100=0
Totalcost=$10,275

MATHEMATICALAPPROACHES
TOAGGREGATEPLANNING
Thefollowingaresomeofthebetterknownmathematicaltechniquesthatcanbeusedinmore
complexaggregateplanningapplications.

LINEARPROGRAMMING.
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Linearprogramming(/knowledge/Linear_programming.html)isanoptimization
(/knowledge/Optimization.html)techniquethatallowstheusertofindamaximumprofitor
revenueoraminimumcostbasedontheavailabilityoflimitedresourcesandcertainlimitations
knownasconstraints.AspecialtypeoflinearprogrammingknownastheTransportationModel
canbeusedtoobtainaggregateplansthatwouldallowbalancedcapacityanddemandandthe
minimizationofcosts.However,fewrealworldaggregateplanningdecisionsarecompatiblewith
thelinearassumptionsoflinearprogramming.SupplyChainManagement:Strategy,Planning
andOperation,bySunilChopraandPeterMeindl,providesanexcellentexampleoftheuseof
linearprogramminginaggregateplanning.

MIXEDINTEGERPROGRAMMING.
Foraggregateplansthatarepreparedonaproductfamilybasis,wheretheplanisessentially
thesummation(/knowledge/Summation.html)oftheplansforindividualproductlines,mixed
integerprogrammingmayprovetobeuseful.Mixedintegerprogrammingcanprovideamethod
fordeterminingthenumberofunitstobeproducedineachproductfamily.

LINEARDECISIONRULE.
Lineardecisionruleisanotheroptimizingtechnique.Itseekstominimizetotalproductioncosts
(labor,overtime,hiring/layoff,inventorycarryingcost)usingasetofcostapproximating
functions(threeofwhicharequadratic)toobtainasinglequadraticequation.Then,byusing
calculus,twolinearequationscanbederivedfromthequadraticequation,onetobeusedtoplan
theoutputforeachperiodandtheotherforplanningtheworkforceforeachperiod.

MANAGEMENTCOEFFICIENTSMODEL.
Themanagementcoefficientsmodel,formulatedbyE.H.Bowman,isbasedonthesuggestion
thattheproductionratefor

Figure2
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anyperiodwouldbesetbythisgeneraldecisionrule:
Pt=aWt1bIt1+cFt+1+K,where
Pt=theproductionratesetforperiodt
Wt1=theworkforceinthepreviousperiod
It1=theendinginventoryforthepreviousperiod
Ft+1=theforecastofdemandforthenextperiod
a,b,c,andKareconstants
Itthenusesregressionanalysistoestimatethevaluesofa,b,c,andK.Theendresultisa
decisionrulebasedonpastmanagerialbehaviorwithoutanyexplicitcostfunctions,the
assumptionbeingthatmanagersknowwhatisimportant,eveniftheycannotreadilystate
explicitcosts.Essentially,thismethodsupplementstheapplicationofexperiencedjudgment.

SEARCHDECISIONRULE.
Thesearchdecisionrulemethodology(/knowledge/Methodology.html)overcomessomeofthe
limitationsofthelinearcostassumptionsoflinearprogramming.Thesearchdecisionruleallows
theusertostatecostdatainputsinverygeneralterms.Itrequiresthatacomputerprogrambe
constructedthatwillunambiguouslyevaluateanyproductionplan'scost.Itthensearchesamong
alternativeplansfortheonewiththeminimumcost.However,unlikelinearprogramming,there
isnoassuranceofoptimality.

SIMULATION.
Anumberofsimulation(/knowledge/Simulation.html)modelscanbeusedforaggregate
planning.Bydevelopinganaggregateplanwithintheenvironmentofasimulationmodel,itcan
betestedunderavarietyofconditionstofindacceptableplansforconsideration.Thesemodels
canalsobeincorporatedintoadecisionsupportsystem,whichcanaidinplanningand
evaluatingalternativecontrolpolicies.Thesemodelscanintegratethemultipleconflicting
objectivesinherentinmanufacturingstrategybyusingdifferentquantitativemeasuresof
productivity,customerservice,andflexibility.

FUNCTIONALOBJECTIVESEARCHAPPROACH.
Thefunctionalobjectivesearch(FOS)systemisacomputerizedaggregateplanningsystemthat
incorporatesabroadrangeofactualplanningconditions.Itiscapableofrealistic,lowcost
operatingschedulesthatprovideoptionsforattainingdifferentplanninggoals.Thesystemworks
bycomparingtheplanningloadwithavailablecapacity.Aftermanagementhaschosenits
desiredactionsandassociatedplanningobjectivesforspecificloadconditions,thesystem
weightseachplanninggoaltoreflectthefunctionalemphasisbehinditsachievementatacertain
loadcondition.Thecomputerthenusesacomputersearchtooutputaplanthatminimizescosts
andmeetsdeliverydeadlines.

AGGREGATEPLANNINGINSERVICES.
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Formanufacturingfirmstheluxuryofbuildingupinventoriesduringperiodsofslackdemand
allowscoverageofananticipatedtimewhendemandwillexceedcapacity.Servicescannotbe
stockpiledorinventoriedsotheydonothavethisoption.Also,sinceservicesareconsidered
"perishable,"anycapacitythatgoesunusedisessentiallywasted.Anemptyhotelroomoran
emptyseatonaflightcannotbeheldandsoldlater,ascanamanufactureditemheldin
inventory.
Servicecapacitycanalsobeverydifficulttomeasure.Whencapacityisdictatedsomewhatby
machinecapability,reasonablyaccuratemeasuresofcapacityarenotextremelydifficultto
develop.However,servicesgenerallyhavevariableprocessingrequirementsthatmakeit
difficulttoestablishasuitablemeasureofcapacity.
Historically,servicesaremuchmorelaborintensivethanmanufacturing,wherelaboraverages
10percent(orless)oftotalcost.Thislaborintensitycanactuallybeanadvantagebecauseof
thevarietyofservicerequirementsanindividualcanhandle.Thiscanprovidequiteadegreeof
flexibilitythatcanmakeaggregateplanningeasierforservicesthanmanufacturing.

WHAT'SNEWINAGGREGATEPLANNING.
RudyHung,inhisProductionandInventoryManagementJournalarticleentitled"Annualized
HoursandAggregatePlanning,"presentsanew,usefulideaforaggregateplanningcalled
AnnualizedHours(AH).UnderAH,employeesarecontractedtoworkforacertainnumberof
hours(say1,800hours)peryear,foracertainsumofmoney.Employeescanbeaskedtoputin
morehoursduringbusyperiodsandfewerhoursinslowperiods.Typically,employeesreceive
equalmonthlyorweeklypaymentssothathourlyworkersineffecthavegainedsalariedstatus.
Overtimeispaidonlywhenemployeeshaveworkedbeyondtheirannualhours.
AHisalsoknownasflexiyear,asitcanbeseenasanextensionofflextime,inwhichemployees
canvarytheirworkhourswithinlimits.ThisconceptisusedalmostexclusivelyinEurope,
particularlyintheUnitedKingdom.TheScandinavianpulpandpaperindustriespioneeredAHin
themid1970s.Aroundthattime,someWestGermanfirms,particularlythoseintheretail
industry,alsousedAH.
AHgivesemployersmuchflexibility.AHservestocutlaborcostsbyofferingemployeesan
annualsumlessthantheirpreviousannualearningswithovertime.Eventhoughtheirtotal
earningsmayfall,theiraverageearningsperhourwouldremainthesameorevenrise.Effective
earningscouldriseevenmoresoiftheemployerisunabletoconsumeallcontractedhours.
Employeeshavegreaterincomesecuritywithnoworriesaboutlayoffs.Thereisalsoincreased
moralebecausebluecollarworkers(/knowledge/Blue_collar_worker.html)arenowsalaried.
Anotherdevelopmentaffectingaggregateplanningispostponement.Thisreferstodelayingthe
"finish"ofaproductuntilthemomentofsale.Firmsthatrelyonthepostponementstrategy,such
asPCmakerDell(/knowledge/Dell.html)Inc.orclothingfranchiseBenettonGroupSp.A.,
dependupontheavailabilityofaggregateinventoriesofcomponentsthatcanbeassembledto
ordershortlyafter,orevenimmediately,asanorderistaken.
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SEEALSO:CapacityPlanning(../BunComp/CapacityPlanning.html)Planning(../Or
Pr/Planning.html)Simulation(../ScStr/Simulation.html)
R.AnthonyInman

FURTHERREADING:
Chopra,SunilandPeterMeindl.SupplyChainManagement:Strategy,Planning,andOperation.
UpperSaddleRiver,NJ:PearsonPrenticeHall,2004.
Dejonckheere,J.,S.M.Disney,M.Lambrecht,andD.R.Towill."TheDynamicsofAggregate
Planning."ProductionPlanning&Control14,no.6,(2003):497516.
Finch,ByronJ.OperationsNow.Boston:McGrawHillIrwin,2004.
Hung,Rudy."AnnualizedHoursandAggregatePlanning."ProductionandInventory
ManagementJournal38,no.4(1997).
Iyer,AnanthV.,VinayakDeshpande,andZhengpingWu."APostponementModelforDemand
Management."ManagementScience49,no.8,(2003):9831002.
Stevenson,WilliamJ.ProductionOperationsManagement.Boston:McGrawHillIrwin,2004.

AlsoreadarticleaboutAggregatePlanning
(/knowledge/Aggregate_planning.html)fromWikipedia

UserContributions:
1

Ali

(/management/A

Oct24,2009@11:23pm

YourarticleissousefulinhelpingmetounderstandthisinventorycourseIamtaking.
Thankyou,
2

dayanita

(/management/A

Oct11,2011@9:09am

Finallyiunderstoodwhatanaggregateplanningis!!!thanku

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