Aggregate Planning

For academic purpose and private circulation

only

Aggregate Planning
Planning matches supply and demand
Intermediate Time Horizon: 6-12 months / 3-18 months
Aggregate means:
Plans are developed for product lines or families and not for

individual products

Resources are also expressed in aggregate terms e.g. labor

hours not specified by labor grade

Also referred to as Sales and Operations Planning

4-2

Aggregate
Planning
During intermediate time horizon:
Increasing capacity by building new facility or facility

expansion or purchasing new equipment is not an option

Available

options to meet demand (in

aggregate planning) are:
Manage Capacity (i.e. Hire or lay off workers;
Overtime; extra shifts; subcontracting; using inventory,
backlogs)

Manage Demand (i.e Promotions)

Goal is to minimize costs or maximize profit
14-3

Aggregate / Sales and Operations Planning

Process

Operations convert sales plan to schedule of

production per month/quater meeting demand as
economically as possible

14-4

Aggregate Planning
Determines resource capacity a firm will need

to meet demand over an intermediate time

horizon

It is a process by which company determines levels

of capacity, production, subcontracting, inventory,

stockouts, and pricing over a specified time horizon

14-5

Disaggregation
Breaking an aggregate plan into more detailed

plans
Create Master Production Schedule for Material

Requirements Planning and Shop floor schedules

14-6

Aggregate Planning
A
Items:
Product lines
or families
Individual
Products
Components
that make
the products
Manufacturi
ng
Operations
to make
each
component

Production Planning
Aggregate Plan or
Sales or Operations
Plan
Master Production
Schedule
Materials
Requirement Plan

Time
horizon
gets
shorter in
moving
from
aggregate
plan to next
lower level

Shop Floor Schedule

14-7

The Aggregate Planning Problem

Given the demand forecast for each period in

the planning horizon, determine the production
level, inventory level, and the capacity level for
each period that maximizes the firms (supply
chains) profit over the planning horizon

Aggregate Planning Strategies

There are three distinct aggregate planning
strategies to achieve balance among various
costs:
Chase strategy using capacity as the lever
Level strategy using inventory as the lever
Time

flexibility

from

workforce

or

capacity

strategy using utilization as the lever

Tailored or hybrid strategy a combination of
above strategies, mostly used

Chase Strategy

Production rate varied as per demand rate

Vary machine capacity by say hire and lay off

workers as demand varies

Often difficult to vary capacity and workforce on

short notice

Expensive if cost of varying machine and labor

capacity is high

Negative effect on workforce morale

Results in low levels of inventory

Used when inventory holding costs are high

and costs of changing capacity are low

Demand

Units

Production

Time

Production plan matched to demand pattern by

various means especially by hiring and laying off
workers. Cost of this strategy is cost of hiring and
firing workers. Useful in industries where low

14-11

Level Strategy

Stable machine capacity and workforce levels, constant

output rate

Either inventories are build in anticipation of demand or backlog

carried over from high to low demand periods

Inventory levels fluctuate over time

Better for worker morale

Large inventories and backlogs may accumulate

Used when inventory holding and backlog costs are

relatively low

Units

Demand

Production

Time

Sets production at a fixed rate to meet average

demand per period and uses inventory to absorb
variations in demand:
Cost involved in this strategy are inventory holding

14-13

Time Flexibility Strategy

Used

when

there

is

excess

machine

capacity

Workforce stable, number of hours worked varies

Use overtime or a flexible work schedule

Flexible workforce, avoids morale problems

Low levels of inventory

Lower average machine utilization

Used when inventory holding costs are

high and capacity is relatively inexpensive

Aggregate Planning Strategies

Three fundamental costs Trade-off available to
aggregate planner are between:
Capacity costs: Cost of varying capacity
Inventory
inventory

holding

costs

Cost

of

holding

Backlog/lost sales costs: Cost of loosing sales or

carrying backlogs from peak demand periods to low
demand periods

Role of Aggregate Planning

in a Supply Chain

Specify operational parameters over the

time horizon
Production quantity from regular time, overtime,
and subcontracted time
Workforce
Overtime
Inventory on hand
Backlog
Subcontracting

Information Needed for

an Aggregate Plan
Aggregate demand forecast Dt for each Period t

over T periods
Production costs
Labor costs, regular time ($/hr) and overtime ($/hr)
Subcontracting costs ($/hr or $/unit)
Cost of changing capacity hiring or layoff ($/worker),
adding or reducing machine capacity ($/machine)
Labor/machine hours required per unit
Inventory holding cost ($/unit/period)
Stockout or backlog cost ($/unit/period)
Constraints overtime, layoffs, capital available,
stockouts, backlogs, from suppliers

Identifying Aggregate Units of Production

Aggregate unit should be identified in a way that

the

resulting

production

schedule

can

be

accomplished in practice

Focus on the bottlenecks when selecting the

aggregate

unit

and

identifying

capacity

and

setups

and

production times

Account

for

maintenance

activities

such

as

Identifying Aggregate Units of ProductionIllustration

Produ
ct
Type

Materi
al
Cost/
Unit
($)

Revenu
e/ Unit
($)

Setup
Time/ Averag
Batch
e
(hour Batch
)
Size

Productio
n Time/
Unit
(hour)

Net
Producti
on
Time/Uni
t (hour)

Percent
age
Share of
Units
Sold

15

54

50

5.60

5.76

10

30

150

3.00

3.04

25

39

100

3.80

3.88

20

12

49

10

50

4.80

5.00

10

36

100

3.60

3.66

20

13

48

75

4.30

4.37

15

Identifying Aggregate Units of ProductionIllustration

Weighted average approach

Material cost per aggregate unit
= 15 x 0.10 + 7 x 0.25 + 9 x 0.20 + 12 x 0.10 + 9
x 0.20 +
13 x 0.15
= $10

Similarly
Revenue per aggregate unit = $40
Net production time per aggregate unit = 4.00
hours

Aggregate Planning Using

Linear Programming
Illustration:
A
case
of
manufacturing tools
Highly seasonal demand

Month

Demand Forecast

January

1,600

February

3,000

March

3,200

April

3,800

May

2,200

June

2,200

firm

Table 8-2

Illustration
Item

Cost

Material cost

$10/unit

Inventory holding cost

$2/unit/month

Marginal cost of
stockout/backlog

$5/unit/month

Hiring and training costs

$300/worker

Layoff cost

$500/worker

Labor hours required

4/unit

Regular time cost

$4/hour

Overtime cost

$6/hour

Cost of subcontracting

$30/unit

Revenue per aggregate unit = $40

Illustration
Starting January Inventory: 1000 tools
Plant works for 20 days / month
Each employee works 8 hrs / day
No employee can work more than 10 hours of

overtime / month
Inventory costs are incurred at the end of each
month
All stockouts/ backlogs to be supplied in the
following months
All demand to be met

4-23

Illustration

Supply Chain Manager has to generate

an aggregate plan so that:

Costs is minimised
No stockout in June end
At least 500 units of inventory at June end

4-24

Illustration- Decision Variables

For t = 1, ..., 6
Wt = Workforce size for month t
Ht = Number of employees hired at the beginning of month t
Lt

= Number of employees laid off at the beginning of month

t

Pt = Production in month t
It

= Inventory at the end of month t

St = Number of units stocked out at the end of month t

Ct = Number of units subcontracted for month t
Ot = Number of overtime hours worked in month t

Objective Function

Minimize
(Regular-time labor cost + Overtime labor cost + Cost of
hiring and layoffs + Cost of holding inventory + Cost of
stocking out + Cost of subcontracting + Material cost)
6

t1

t1

t1

t1

Min 640Wt 6Ot 300Ht 500Lt

6

t1

t1

t1

t1

2I t 5St 10Pt 30Ct

Constraints
All for t = 1,..., 6

Workforce, hiring, and layoff constraints

Wt W t1Ht Lt

Capacity constraints

Ot
Pt 40Wt
4

Inventory balance constraints

I t1 Pt Ct Dt St1 I t St

Overtime limit constraints

Ot 10Wt

Average inventory

(I 0 I T ) / 2
T

Average time
in inventory

(I 0 I T ) / 2

I
T 1
t1

T 1
t1

T 1

t1