Aggregate production planning

Aggregate production planning is concerned with planning overall production

of all products combined (i.e., in tones of steel, liters of paint etc.) over a
planning horizon (generally next 3 to 6 months or max 1 year) for a given
(forecast) demand schedule.
An aggregate plan will determine workforce levels, Machining time, over-
time, allocation over planning horizon, and inventory levels with the objective
of minimizing cost. These results help in the development of operating
budgets. Like, workforce levels will be translated into the labor budge, and
inventory levels can be used to determine requirements of storage space.

Management options to meet fluctuation demand

Many aggregate planning strategies are available to the manager. These
strategies involve the manipulation of inventory, production rate, manpower
needs, capacity, and other controllable variables. When we very any one of
the variables at a time to cope with changes in product output rates, we call it
as pure strategies. Mixed strategies, in contrast, involve the use of two or
more pure strategies to arrive at a feasible production plane.
 Aggregate production planning
Management options to meet fluctuation demand
1 Pure strategies
I Changing inventory levels: Build inventories in slack periods in anticipation
of higher demands later in planning horizon. If we accumulate inventories
during slack periods of demands, working capital and cost associated with
obsolescence, storage, insurance, and handling will increase. Conversely,
during periods of increase demand, changes in inventory levels or backlogs
might lead to poorer customer service, longer lead times, possible lost sales,
and potential entry of new competitors in the market.
II Changing workforce size: The manager may change the size of the workforce
by hiring and firing of employees to match the production rate so as to meet
the demand exactly. In many instances new employees require training and
the average productivity is temporarily lowered. A layoff frequently results in
lower worker morale and lower productivity, and the remaining employees
may retard output to protect themselves against a similar fate.
 Aggregate production planning
Management options to meet fluctuation demand
1 Pure strategies
III Varying working hours: Use over time in peak periods, and under time in
slack periods to very output, while holding work force and facilities constant.
However, there is a limit on how much over time is practical. Excessive
overtime may weak workers and their productivity may go down. The
incremental costs associated with shift premium, supervision, and overhead
may be significant. In period of slack demand, the firm also faces the difficult
task of absorbing the workers idle time.
IV Subcontracting: As an alternative to changing workforce or inventory, perhaps
the company could subcontract some work during the peak demand periods
and increase the capacity to satisfy the demand. Again, a potential danger
exists of opening doors to competition.
V Influencing demand: Because changing demand is a chief source of aggregate
planning problems, management may decide to influence the demand pattern
itself. For example, telephone companies level their loads by offering lower
evening rates. The airline industry offers weekend discounts and winter fares.
But it is not always possible.
 Aggregate production planning
Management options to meet fluctuation demand
1 Pure strategies
VI Very capacity through changes in plant and equipment: But it is generally
long term option.
2 Mixed strategies
Every pure strategy has a countervailing cost associated with it, and pure
strategies are often infeasible. Therefore, a combination of strategies, or
mixed strategy, is often used. Mixed strategies involve the use of two or more
controllable variables to arrive at a feasible production plan.
 Aggregate production planning
Example #1:
ABC Corporation has developed a forecast for a group of items that has the
following seasonal demand pattern.

Quarter Demand Cumulative Demand

1 220 220
2 170 390
3 400 790
4 600 1390
5 380 1770
6 200 1970
7 130 2100
8 300 2400

Suppose that the firm estimates that it costs $100 per unit to increase the production rate, $150
to decrease the production rate, $50 per unit per quarter to carry the items on inventory, and an
incremental cost of $80 per unit if subcontracted. Compare the cost incurred if pure strategies
are used.
Aggregate production planning

Cumulative requirements graph

Cumulative and average forecast graph.

 Aggregate production planning
Example #1:
ABC Corporation has developed a forecast for a group of items that has the
following seasonal demand pattern.

Quarter Demand Cumulative Demand

1 220 220
2 170 390
3 400 790
4 600 1390
5 380 1770
6 200 1970
7 130 2100
8 300 2400

Suppose that the firm estimates that it costs $100 per unit to increase the production rate, $150
to decrease the production rate, $50 per unit, per quarter to carry the items on inventory, and an
incremental cost of $80 per unit if subcontracted. Compare the cost incurred if pure strategies
are used.
 Aggregate production planning
Plan 1: Changing inventory levels.
Table 1 cost of changing inventory levels to meet the demand
Quarter Demand Cumulat Cumulativ Inventory Adjusted Cost of holding
Forecast ive e inventory with inventories ($)
Demand production 270 units at the
beginning of
period 1
1 220 220 300 300-220 = 80 350 350*50 =
17500
2 170 390 600 600-390= 210 480 24000
3 400 790 900 900-790= 110 380 19000
4 600 1390 1200 1200-1390= -190 80 4000
5 380 1770 1500 -270 0 0
6 200 1970 1800 -170 100 5000
7 130 2100 2100 0 270 13500
8 300 2400 2400 0 270 13500
Total 96500
 Aggregate production planning

Plan 2: Changing workforce size.

Table 2 cost of varying the workforce size to meet the demand

Quarter Demand Forecast Cost of increasing Cost of decreasing Total cost ($)
production level: production level:
Hiring ($) Firing ($)
1 220
2 170 50*150=7500 7500
3 400 230*100= 23000 23000
4 600 200*100 = 20000 20000
5 380 220*150=33000 33000
6 200 180*150=27000 27000
7 130 70*150=10500 10500
8 300 170*100 = 17000 17000

Total 138,000
 Aggregate production planning
Plan 3: Varying working hours.
The firm chooses to produce an amount equal to its lowest requirements
and meet the rest of the demand by varying the working hours. Incremental
overtime cost is $75 per unit.

Table 3 cost of varying the working hours to meet the demand

Quarter Demand Forecast Additional units needs after regular Cost of overtime
time production
1 220 220-130 = 90 90*75 = 6750
2 170 170-130 = 40 40*75 = 3000
3 400 400-130 = 270 20250
4 600 600-130 = 470 35250
5 380 250 18750
6 200 70 5250
7 130 0 0
8 300 170 12750
Total 102000
 Aggregate production planning

Plan 4: Subcontracting.
Table 4 Subcontracting cost

Quarter Demand Forecast Production Subcontract unit Incremental cost for

units subcontracting
1 220 130 220-130 = 90 90*80 = 7200
2 170 130 170-130 = 40 40*80 = 3200
3 400 130 270 21600
4 600 130 470 37600
5 380 130 250 20000
6 200 130 70 5600
7 130 130 0 0
8 300 130 170 13600
Total 108800
 Aggregate production planning
Plan 5: Mixed strategy.
The firm chooses to vary production capacity slightly up and down as aggregate demand
varies. Drastic changes in production capacity are curtailed and frequent hiring and firing
situations are avoided. Based on past experience and available personnel, management
decides to maintain a constant production rate of 200 units per quarter and permit 25%
overtime when the demand exceed the production rate. To meet any further demand, the
firm chooses to hire and fire policy. Overtime cost is $1000 per 50 units,

Quarte Demand Regular time Additional Overtime Additional units Total Cost of Cost of Cost of Total cost
r Forecast Production units required production required after regular excess or inventory overtime changing
(units) after regular time+ Overtime shortage of workforce
time production product

1 220 200 20 50 -30 -30 1500 1000 0 2500

2 170 200 -30 -30 -60 3000 0 0 3000
3 400 200 200 50 150 90 0 1000 9000 10000
4 600 200 400 50 350 350 0 1000 26000 27000
5 380 200 180 50 130 130 0 1000 33000 34000
6 200 200 0 0 0 19500 19500
7 130 200 -70 -70 -70 3500 0 0 3500
8 300 200 100 50 50 -20 1000 1000 0 2000

Total 101500