Aggregate Planning

Determine the quantity and timing of

production for the immediate future
; Objective is to minimize cost over the
planning period by adjusting
; Production rates
Ir. Haery Sihombing/IP
Sihombing/IP
Pensyarah Fakulti Kejuruteraan Pembuatan ; Labor levels
Universiti Teknologi Malaysia Melaka
; Inventory levels

7
; Overtime work
AGGREGATE & CAPACITY ; Subcontracting
PLANNING ; Other controllable variables

Aggregate Planning The Planning Process

Long-range plans
(over one year)
Research & Development
Required for aggregate planning New product plans
Capital investment
Facility location/expansion

; A logical overall unit for measuring Top

executives Intermediate-range plans
sales and output (3 to 18 months)
Sales planning
Production planning and budgeting
; A forecast of demand for intermediate Operations Setting employment, inventory,
subcontracting levels
planning period in these aggregate units managers
Analyzing cooperating plans

; A method for determining costs Short-range plans

(up to 3 months)
Job assignments
; A model that combines forecasts and Operations
managers,
Ordering
Job scheduling
costs so that scheduling decisions can supervisors,
foremen
Dispatching
Overtime
be made for the planning period Part-time help

Responsibility Planning tasks and horizon Figure 13.1

Aggregate Planning Aggregate Planning

Marketplace Product Research
Quarter 1 and decisions
and
demand technology
Jan Feb Mar
Process
150,000 120,000 110,000 planning and
capacity
Demand decisions
forecasts,
orders
Quarter 2 Workforce
Raw
materials
Aggregate available
Apr May Jun plan for
production Inventory
on
100,000 130,000 150,000 External
hand
capacity
Master (subcontractors)
production
schedule and
Quarter 3 MRP
systems
Jul Aug Sep
180,000 150,000 140,000 Detailed
work
schedules Figure 13.2
 Aggregate Planning
; Combines appropriate resources
into general terms
; Part of a larger production planning
system
; Disaggregation breaks the plan
down into greater detail
; Disaggregation results in a master
production schedule
Capacity Options
; Changing inventory levels
; Increase inventory in low demand
periods to meet high demand in
the future
; Increases costs associated with
storage, insurance, handling,
obsolescence, and capital
investment
; Shortages can mean lost sales due
to long lead times and poor
customer service
Capacity Options
; Varying production rate through
overtime or idle time
; Allows constant workforce
; May be difficult to meet large
increases in demand
; Overtime can be costly and may
drive down productivity
; Absorbing idle time may be
difficult
Aggregate Planning
Strategies
1. Use inventories to absorb changes in
demand
2. Accommodate changes by varying
workforce size
3. Use part-
part-timers, overtime, or idle time to
absorb changes
4. Use subcontractors and maintain a stable
workforce
5. Change prices or other factors to
influence demand
Capacity Options
; Varying workforce size by hiring
or layoffs
; Match production rate to demand
; Training and separation costs for
hiring and laying off workers
; New workers may have lower
productivity
; Laying off workers may lower
morale and productivity
Capacity Options
; Subcontracting
; Temporary measure during
periods of peak demand
; May be costly
; Assuring quality and timely
delivery may be difficult
; Exposes your customers to a
possible competitor
 Capacity Options Demand Options
; Using part-
part-time workers ; Influencing demand
; Useful for filling unskilled or low ; Use advertising or promotion to
skilled positions, especially in increase demand in low periods
services ; Attempt to shift demand to slow
periods
; May not be sufficient to balance
demand and capacity

Demand Options Demand Options

; Back ordering during high-
high- ; Counterseasonal product and
demand periods service mixing
; Requires customers to wait for an ; Develop a product mix of
order without loss of goodwill or counterseasonal items
the order ; May lead to products or services
; Most effective when there are few outside the company’
company’s areas of
if any substitutes for the product expertise
or service
; Often results in lost sales

Aggregate Planning Options Aggregate Planning Options

Option Advantages Disadvantages Some Comments Option Advantages Disadvantages Some Comments
Changing Changes in Inventory Applies mainly to Varying Matches Overtime Allows flexibility
inventory human holding cost production, not production seasonal premiums; tired within the
levels resources are may increase. service, rates fluctuations workers; may aggregate plan
gradual or Shortages may operations through without hiring/ not meet
none; no abrupt result in lost overtime or training costs demand
production sales. idle time
changes
Sub-
Sub- Permits Loss of quality Applies mainly in
Varying Avoids the costs Hiring, layoff, Used where size contracting flexibility and control; production
workforce of other and training of labor pool is smoothing of reduced profits; settings
size by alternatives costs may be large the firm’
firm’s loss of future
hiring or significant output business
layoffs

Table 13.1 Table 13.1

Aggregate Planning Options Aggregate Planning Options
Option Advantages Disadvantages Some Comments Option Advantages Disadvantages Some Comments
Using part-
part- Is less costly High turnover/ Good for Back May avoid Customer must Allows flexibility
time and more training costs; unskilled jobs in ordering overtime. be willing to within the
workers flexible than quality suffers; areas with large during Keeps capacity wait, but aggregate plan
full-
full-time scheduling temporary labor high-
high- constant. goodwill is lost.
workers difficult pools demand
periods
Influencing Tries to use Uncertainty in Creates
demand excess demand. Hard marketing Counter-
Counter- Fully utilizes May require Risky finding
capacity. to match ideas. seasonal resources; skills or products or
Discounts draw demand to Overbooking product allows stable equipment services with
new customers. supply exactly. used in some and service workforce outside the opposite
businesses. mixing firm’
firm’s areas of demand
expertise patterns

Table 13.1 Table 13.1

Methods for Aggregate Mixing Options to

Planning Develop a Plan
; A mixed strategy may be the best ; Chase strategy
way to achieve minimum costs ; Match output rates to demand
forecast for each period
; There are many possible mixed
strategies ; Vary workforce levels or vary
production rate
; Finding the optimal plan is not ; Favored by many service
always possible organizations

Mixing Options to Graphical and Charting

Develop a Plan Methods
; Level strategy ; Popular techniques
; Daily production is uniform
; Easy to understand and use
; Use inventory or idle time as buffer
; Trial-
Trial-and-
and-error approaches that do
; Stable production leads to better not guarantee an optimal solution
quality and productivity
; Require only limited computations
; Some combination of capacity
options, a mixed strategy, might be
the best solution
 Graphical and Charting Planning Example 1
Methods
Production Demand Per Day
Month Expected Demand Days (computed)
1. Determine the demand for each period Jan 900 22 41
Feb 700 18 39
2. Determine the capacity for regular time, Mar 800 21 38
overtime, and subcontracting each period Apr 1,200 21 57
May 1,500 22 68
3. Find labor costs, hiring and layoff costs, June 1,100 20 55
and inventory holding costs 6,200 124

4. Consider company policy on workers and Table 13.2

Average Total expected demand
stock levels requirement = Number of production days
5. Develop alternative plans and examine 6,200
their total costs = = 50 units per day
124

Planning Example 1 Planning Example 1

Forecast demand
Cost Information
Production rate per working day

Inventory carrying cost $ 5 per unit per month

70 –
Level production using average
monthly forecast demand Subcontracting cost per unit $10 per unit
60 – $ 5 per hour ($40 per day)
Average pay rate day)
50 – $ 7 per hour
Overtime pay rate
(above 8 hours per day)
day)
40 – Labor-
Labor-hours to produce a unit 1.6 hours per unit
30 – Cost of increasing daily production rate $300 per unit
(hiring and training)
Cost of decreasing daily production rate $600 per unit
(layoffs)
0 –
Jan Feb Mar Apr May June = Month
Ð Ð Ð Ð Ð Ð Table 13.3
22 18 21 21 22 20 = Number of
Figure 13.3 working days

Planning Example 1 Planning Example 1

Monthly Monthly
Cost Information
Production at Demand Inventory Ending Cost
CostsInformation
Production at Demand Calculations
Inventory Ending
Inventory 50 Units
Month carry cost per Day Forecast $ 5Change
per unit per Inventory
month Month 50 Units
Inventory carry
Inventory cost
carrying per Day Forecast $ 5
$9,250 (= 1,850Change
perunits
unit per x $5
Inventory
month
carried
Jan
Subcontracting 1,100
cost per unit 900 $10 +200
per unit 200 Jan
Subcontracting 1,100
cost per unit 900 per unit)
$10 +200
per unit 200
Feb pay rate 900
Average 700 +200
$ 5 per 400
hour ($40 per day)
day) Regular-time
Feb pay rate
Average 900
labor 49,600700 (= 10 +200
$ 5 workers
per x $40per
hour ($40 400
perday)
day)
1,050 800 +250 650 1,050 800 day 124 days) 650
x+250
Mar $ 7 per hour Mar $ 7 per hour
Overtime pay rate Overtime pay rate
(above 8 hours per day)
day) Other (above 8 hours per day)
day)
Apr 1,050 1,200 -150 500 Apr costs (overtime,
1,050 1,200 -150 500
Labor- 1.6 hours per unit hiring, layoffs, 1.6 hours per unit
May-hours to produce
Labor 1,100 a unit 1,500 -400 100 Labor-
Labor
May -hours to produce a unit
subcontracting) 1,100 1,500
0 -400 100
Cost of increasing daily production rate $300 per unit Cost of increasing daily production rate $300 per unit
June 1,000
(hiring and training)
1,100 -100 0 June
Total cost
(hiring
1,000
and training)
1,100
$58,850 -100 0
(hiring and training)
Cost of decreasing daily production rate $600 per unit 1,850 Cost of decreasing daily production rate $600 per unit 1,850
(layoffs) (layoffs)
Total units of inventory carried over from one Total units of inventory carried over from one
Table 13.3 month to the next = 1,850 units Table 13.3 month to the next = 1,850 units
Workforce required to produce 50 units per day = 10 workers Workforce required to produce 50 units per day = 10 workers
 Planning Example 1 Planning Example 2
7,000 –
Production Demand Per Day
Month Expected Demand Days (computed)
6,000 – Reduction
Jan 900 22 41
Cumulative demand units

of inventory
5,000 – Feb 700 18 39
Cumulative level
production using Mar 800 21 38
average monthly
4,000 –
forecast Apr 1,200 21 57
requirements May 1,500 22 68
3,000 – June 1,100 20 55
6,200 124
2,000 – Cumulative forecast
requirements Table 13.2
1,000 –
Excess inventory

– Minimum requirement = 38 units per day

Jan Feb Mar Apr May June
Figure 13.4

Planning Example 2 Planning Example 2

Forecast demand
Cost Information
Production rate per working day

Inventory carrying cost $ 5 per unit per month

70 –
Level production Subcontracting cost per unit $10 per unit
60 – using lowest $ 5 per hour ($40 per day)
monthly forecast Average pay rate day)
50 – demand $ 7 per hour
Overtime pay rate
(above 8 hours per day)
day)
40 – Labor-
Labor-hours to produce a unit 1.6 hours per unit
30 – Cost of increasing daily production rate $300 per unit
(hiring and training)
Cost of decreasing daily production rate $600 per unit
(layoffs)
0 –
Jan Feb Mar Apr May June = Month
Ð Ð Ð Ð Ð Ð Table 13.3
22 18 21 21 22 20 = Number of
working days

Planning Example 2 Planning Example 2

Cost Information Cost Information
Inventory carry cost $ 5 per unit per month Inventory carry cost $ 5 per unit per month
In-housecost
Subcontracting production
per unit = 38$10units per day
per unit In-housecost
Subcontracting production
per unit = 38$10units per day
per unit
Average pay rate x $124
5 perdays
hour ($40 per day)
day) Average pay rate x $124
5 perdays
hour ($40 per day)
day)

Overtime pay rate

= 4,712
$ 7 perunits
hour
Overtime pay rate
= 4,712
$ 7 perunits
hour
(above 8 hours per day)
day) (above 8 hours per day)
day)
Labor- Subcontract
Labor-hours units
to produce a unit = 6,200 - 4,712
1.6 hours per unit Subcontract
Costs-hours
Labor-
Labor units
to produce a unit = 6,200 - 4,712
1.6 hours
Calculations per unit

= 1,488 units
Cost of increasing daily production rate $300 per unit Regular-time
Cost labor
of increasing $37,696
daily production = 1,488 unitsx $40 per
rate (= 7.6
$300workers
per unit
(hiring and training) (hiring and training) day x 124 days)
Cost of decreasing daily production rate $600 per unit Cost 14,880rate (= $600
of decreasing daily production
Subcontracting 1,488per unitx $10 per
units
(layoffs) (layoffs)
unit)
Table 13.3 Table 13.3
Total cost $52,576
 Planning Example 3 Planning Example 3
Production Demand Per Day

Production rate per working day

Month Expected Demand Days (computed) Forecast demand and
monthly production
Jan 900 22 41 70 –
Feb 700 18 39
60 –
Mar 800 21 38
Apr 1,200 21 57 50 –
May 1,500 22 68
40 –
June 1,100 20 55
6,200 124 30 –
Table 13.2

0 –
Production = Expected Demand Jan Feb Mar Apr May June = Month
Ð Ð Ð Ð Ð Ð
22 18 21 21 22 20 = Number of
working days

Planning Example 3 Planning Example 3

Basic
Cost Information Cost Information Production
Cost Extra Cost of Extra Cost of
Inventory carrying cost $ 5 per unit per month Inventory carrying cost
Daily (demand x $ 5 perDecreasing
Increasing unit per month
Forecast Prod 1.6 hrs/unit x Production Production
Subcontracting cost per unit $10 per unit Subcontracting
Month (units) cost
Rate per unit
$5/hr) $10
(hiring cost) per unitcost) Total Cost
(layoff
Average pay rate $ 5 per hour ($40 per day)
day) Average
Jan 900 rate 41
pay $ 7,200 — $ 5 per hour
— ($40 per$ day)
day)
7,200

$ 7 per hour 700 $ 7 per hour

$1,200
Overtime pay rate Feb
Overtime pay rate39 5,600 —
(= 2 x $600)
6,800
(above 8 hours per day)
day) (above 8 hours per day)
day)
$600
Labor-
Labor-hours to produce a unit 1.6 hours per unit 800 to produce
Mar -hours
Labor-
Labor 38 6,400
a unit — 1.6 hours
(= 1 xper unit
$600)
7,000

Cost of increasing daily production rate $300 per unit Cost

Apr of increasing
1,200 57daily production
9,600
$5,700$300 per unit
rate — 15,300
(hiring and training) (hiring and training) (= 19 x $300)
$3,300
Cost of decreasing daily production rate $600 per unit Cost 1,500
May of decreasing 68 daily production
12,000 rate $600
(= 11 x $300)
per —
unit 15,300
(layoffs) (layoffs)
$7,800
June 1,100 55 8,800 — 16,600
(= 13 x $600)
Table 13.3 Table 13.3
$49,600 $9,000 $9,600 $68,200

Comparison of Three Plans Mathematical Approaches

Cost Plan 1 Plan 2 Plan 3

; Useful for generating strategies
Inventory carrying $ 9,250 $ 0 $ 0 ; Transportation Method of Linear
Programming
Regular labor 49,600 37,696 49,600
Overtime labor 0 0 0
; Produces an optimal plan
Hiring 0 0 9,000 ; Management Coefficients Model
Layoffs 0 0 9,600 ; Model built around manager’
manager’s
Subcontracting 0 0 0 experience and performance
Total cost $58,850 $52,576 $68,200 ; Other Models
; Linear Decision Rule
Plan 2 is the lowest cost option Table 13.5 ; Simulation
 Transportation Method Transportation Example
Sales Period
Mar Apr May Important points
Demand 800 1,000 750 1. Carrying costs are $2/tire/month.
$2/tire/month. If
Capacity: goods are made in one period and held
Regular 700 700 700 over to the next, holding costs are
Overtime 50 50 50 incurred
Subcontracting 150 150 130
Beginning inventory 100 tires 2. Supply must equal demand, so a
dummy column called “unused
Costs
Regular time $40 per tire
capacity”
capacity” is added
Overtime $50 per tire 3. Because back ordering is not viable in
Subcontracting $70 per tire this example, cells that might be used to
Carrying $ 2 per tire Table 13.6 satisfy earlier demand are not available

Transportation Example Transportation

Important points Example
4. Quantities in each column designate the
levels of inventory needed to meet
demand requirements
5. In general, production should be
allocated to the lowest cost cell
available without exceeding unused
capacity in the row or demand in the
column

Table 13.7

Management Coefficients Other Models

Model
Linear Decision Rule
; Builds a model based on manager’
manager’s ; Minimizes costs using quadratic cost curves
experience and performance ; Operates over a particular time period
; A regression model is constructed Simulation
to define the relationships between
decision variables ; Uses a search procedure to try different
combinations of variables
; Objective is to remove ; Develops feasible but not necessarily optimal
inconsistencies in decision making solutions
 Summary of Aggregate Aggregate Planning in
Planning Methods Services
Solution
Techniques Approaches Important Aspects Controlling the cost of labor is critical
Graphical/charting Trial and error Simple to understand and
methods easy to use. Many solutions; 1. Close scheduling of labor-
labor-hours to
one chosen may not be
optimal. assure quick response to customer
Transportation Optimization LP software available; permits demand
method of linear sensitivity analysis and new
programming constraints; linear functions 2. Some form of on-
on-call labor resource
may not be realistic
Management Heuristic Simple, easy to implement;
3. Flexibility of individual worker skills
coefficients model tries to mimic manager’
manager’s
decision process; uses 4. Individual worker flexibility in rate of
regression output or hours
Table 13.8

Five Service Scenarios Five Service Scenarios

; Restaurants ; National chains of small service

; Smoothing the production firms
process ; Planning done at national level
; Determining the workforce size and at local level

; Hospitals ; Miscellaneous services

; Responding to patient demand ; Plan human resource
requirements
; Manage demand

Law Firm Example Five Service Scenarios

(1) (2)
(3)
Likely
(4)
Worst
(5)
Maximum
(6)
Number of
; Airline industry
Category of Best Case Case Case Demand in Qualified
Legal Business (hours) (hours) (hours) People Personnel ; Extremely complex planning
Trial work 1,800 1,500 1,200 3.6 4 problem
Legal research 4,500 4,000 3,500 9.0 32
Corporate law 8,000 7,000 6,500 16.0 15 ; Involves number of flights,
Real estate law 1,700 1,500 1,300 3.4 6
Criminal law 3,500 3,000 2,500 7.0 12
number of passengers, air and
Total hours 19,500 17,000 15,000 ground personnel
Lawyers needed 39 34 30
; Resources spread through the
entire system
Table 13.9
 Yield Management Yield Management Example
Room sales Demand
Allocating resources to customers at Curve
prices that will maximize yield or 100
Potential customers exist who
are willing to pay more than the
revenue $15 variable cost of the room

1. Service or product can be sold in

Passed-up Some customers who paid
advance of consumption contribution $150 were actually willing
50 to pay more for the room
2. Demand fluctuates $ margin
= (Price)
Price) x (50
3. Capacity is relatively fixed rooms)
rooms)
= ($150 - $15)
4. Demand can be segmented x (50) Money left
= $6,750 on the table
5. Variable costs are low and fixed costs $15 $150 Price
are high Variable cost Price charged Figure 13.5
of room for room

Yield Management Example Yield Management Matrix

Room sales Demand
Curve Price
Total $ margin = Tend to be fixed Tend to be variable
100 (1st price) x 30 rooms + (2nd
(1st price) (2nd price) x 30 rooms =
($100 - $15) x 30 + ($200 - $15) x 30 = Quadrant 1: Quadrant 2:
$2,550 + $5,550 = $8,100
Predictable
Movies Hotels
Stadiums/arenas Airlines
Duration of use

60 Convention centers Rental cars

Hotel meeting space Cruise lines

Quadrant 3: Quadrant 4:
Unpredictable

30
Restaurants Continuing care
Golf courses hospitals
Internet service
providers

$15 $100 $200 Price

Variable cost Price 1 Price 2 Figure 13.6 Figure 13.7
of room for room for room

Making Yield Management

Work
1. Multiple pricing structures must • THE END
be feasible and appear logical to
the customer
2. Forecasts of the use and duration
of use
3. Changes in demand