Aggregate Planning

6
Aggregate Planning
Goal: Specify the optimal combination of
production rate
workforce level
inventory on hand

Product group or broad category (Aggregation)

Medium-Range: 6-18 months
7
Aggregate Planning
Terminology
Production Rate
Workforce Level
Inventory on Hand
Inputs
A forecast of aggregate demand covering the selected
planning horizon (6-18 months)
The alternative means available to adjust short- to
medium-term capacity, to what extent each
alternative could impact capacity and the related costs
The current status of the system in terms of
workforce level, inventory level and production rate
Outputs
A production plan: aggregate decisions for each
period in the planning horizon about
workforce level
inventory level
production rate
Projected costs if the production plan was
implemented
Strategies
Matching Demand (Chase Demand)
Level Capacity (Constant Production Rate)
Buffering with inventory
Buffering with backlog
Buffering with overtime or subcontracting
Hybrid strategies ( Mixed Policy)
Matching Demand Strategy
Capacity (Production) in each time period is varied to
exactly match the forecasted aggregate demand in
that time period
Capacity is varied by changing the workforce level
Finished-goods inventories are minimal
Labor and materials costs tend to be high due to the
frequent changes
Level Capacity Strategy
Capacity (production rate) is held level (constant)
over the planning horizon
The difference between the constant production rate
and the demand rate is made up (buffered) by
inventory, backlog, overtime, part-time labor and/or
subcontracting
Developing and Evaluating
the Level Production Plan
Assume that the amount produced each period is
constant, no hirings or layoffs
The gap between the amount planned to be produced
and the forecasted demand is filled with either
inventory or backorders, i.e., no overtime, no idle
time, no subcontracting

Developing and Evaluating
the Level Production Plan
The primary costs of this strategy are inventory
carrying and backlogging costs
Period-ending inventories or backlogs are determined
using the inventory balance equation:

EI
t
= EI
t-1
+ (P
t
- D
t
)

Aggregate Plans for Services
For standardized services, aggregate planning may be
simpler than in systems that produce products
For customized services,
there may be difficulty in specifying the nature and
extent of services to be performed for each
customer
customer may be an integral part of the production
system
Absence of finished-goods inventories as a buffer
between system capacity and customer demand
8
Aggregate Planning Example
Keepdry, a small manufacturing company (200 employees),
produces umbrellas. The company, founded in 1991 produces the
following three product lines: 1) the Executive Line, 2) the Durable
Line and 3) the Compact line shown in the following figure.
Executive
Line
Durable
Line
Compact
Line
9
Aggregate Demand
(Executive Line)
Number of working days:
Jan 22
Feb 19
Mar 21
Apr 21
May 22
Jun 20
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Examples
Cost I nformation
Materials $5/unit
Holding costs $1/unit per mo.
Marginal cost of stockout $1.25/unit per mo.
Hiring and training cost $200/worker
Layoff costs $250/worker
Labor hours required .15 hrs/unit
Straight time labor cost $8/hour
Beginning inventory 250 units
Productive hours/worker/day 7.25
Paid straight hrs/day 8

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Determining Straight Labor Costs and Output
Jan Feb Mar Apr May Jun
Days/mo 22 19 21 21 22 20
Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145
Units/worker 1063.33 918.33 1015 1015 1063.33 966.67
$/worker $1,408 1,216 1,344 1,344 1,408 1,280
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Chase Strategy
(Hiring & Firing--meet demand)
Beginning workforce level: 7 employees
Jan
Days/mo 22
Hrs/worker/mo 159.5
Units/worker 1,063.33
$/worker $1,408
Jan
Demand 4,500
Beg. inv. 250
Net req. 4,250
Req. workers 3.997
Hired
Fired 3
Workforce 4
Ending inventory 0
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Jan Feb Mar Apr May Jun
Days/mo 22 19 21 21 22 20
Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145
Units/worker 1,063 918 1,015 1,015 1,063 967
$/worker $1,408 1,216 1,344 1,344 1,408 1,280
Jan Feb Mar Apr May Jun
Demand 4,500 5,500 7,000 10,000 8,000 6,000
Beg. inv. 250
Net req. 4,250 5,500 7,000 10,000 8,000 6,000
Req. workers 3.997 5.989 6.897 9.852 7.524 6.207
Hired 2 1 3
Fired 3 2 1
Workforce 4 6 7 10 8 7
Ending inventory 0 0 0 0 0 0
15
Jan Feb Mar Apr May Jun
Demand 4,500 5,500 7,000 10,000 8,000 6,000
Beg. inv. 250
Net req. 4,250 5,500 7,000 10,000 8,000 6,000
Req. workers 3.997 5.989 6.897 9.852 7.524 6.207
Hired 2 1 3
Fired 3 2 1
Workforce 4 6 7 10 8 7
Ending inventory 0 0 0 0 0 0
Jan Feb Mar Apr May Jun Costs
Material $21,250.00 $27,500.00 $35,000.00 $50,000.00 $40,000.00 $30,000.00 203,750.00
Labor 5,627.59 7,282.76 9,268.97 13,241.38 10,593.10 7,944.83 53,958.62
Hiring cost 400.00 200.00 600.00 1,200.00
Firing cost 750.00 500.00 250.00 1,500.00
$260,408.62
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Level Workforce
(Surplus and Shortage Allowed)
Workforce level: 6 employees
Jan
Demand 4,500
Beg. inv. 250
Net req. 4,250
Workers 6
Production 6,380
Ending inventory 2,130
Surplus 2,130
Shortage
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Jan Feb Mar Apr May Jun
Demand 4,500 5,500 7,000 10,000 8,000 6,000
Beg. inv. 250 2,130 10 -910 -3,910 -1,620
Net req. 4,250 5,500 7,000 10,000 8,000 6,000
Workers 6 6 6 6 6 6
Production 6,380 5,510 6,090 6,090 6,380 5,800
Ending inventory 2,130 10 -910 -3,910 -1,620 -200
Surplus 2,130 10
Shortage 910 3,910 1,620 200
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Jan Feb Mar Apr May Jun
Demand 4,500 5,500 7,000 10,000 8,000 6,000
Beg. inv. 250 2,130 10 -910 -3,910 -1,620
Net req. 4,250 5,500 7,000 10,000 8,000 6,000
Workers 6 6 6 6 6 6
Production 6,380 5,510 6,090 6,090 6,380 5,800
Ending inventory 2,130 10 -910 -3,910 -1,620 -200
Surplus 2,130 10
Shortage 910 3,910 1,620 200
Jan Feb Mar Apr May Jun
Labor $8,448 $7,296 $8,064 $8,064 $8,448 $7,680 $48,000.00
Material 31,900 27,550 30,450 30,450 31,900 29,000 181,250.00
Carrying 2,130 10 2,140.00
Stockout 1,138 4,888 2,025 250 8,300.00
$239,690.00