Aggregate Planning

Aggregate Planning
Aggregate Production Planning is planning about how
many units of the product are to be produced on a weekly
or monthly basis for the coming six to eighteen months.
This plan should be in line with the overall business plan
of the company.
It determines the resource capacity needed to meet demand
over an intermediate time horizon
Aggregate refers to all product lines or families
Aggregate planning matches supply and demand

Objectives
Establish a company wide game plan for allocating
resources
Develop an economic strategy for meeting demand

Aggregate Planning Process

Steps in Effective Aggregate Planning

Process
Demand Forecasts provided
by the Marketing Department

Business Plan provided

by the Top Management

Level Output Rate Plan

Chase Plan

Varying Utilization Rate Plan

A combination of the pure planning strategies

called the Intermediate Plan is prepared by the
Production Manager

Disaggregating of the Aggregate Production Plan

(Intermediate Plan) is done in order to arrive at a
Master Schedule

Beginning Inventory Status

Projected on-hand Inventory

Master Scheduling Process

Tentative Master Production

Schedule (MPS)

Tentative MPS is run through the Material

Requirements Planning (MRP) Processing
Logic to test for feasibility
Revised Master Production Schedule is
fixed by using Time Fences

Customer orders committed

Available-to-promise Inventory

Rough-cut capacity planning

Oxford University Press 2013. All rights reserved.

Strategies for Pure Aggregate Planning

considered by the Production Manager

Meeting Demand Strategies

Adjusting capacity
Resources necessary to meet demand are
acquired and maintained over the time
horizon of the plan
Minor variations in demand are handled with
overtime or under-time

Managing demand
Proactive demand management

Strategies for Adjusting

Capacity
Level production

Overtime and undertime

Producing at a constant
rate and using inventory
Increasing or decreasing
to absorb fluctuations in
working hours
demand
Subcontracting
Chase demand
Let outside companies
complete the work
Hiring and firing workers
to match demand
Part-time workers

Peak demand

Hiring part time workers to

complete the work

Maintaining resources for

high-demand levels
Backordering
Providing the service or
product at a later time
period

Level Production
Demand
Production
Units
Time

Chase Demand
Demand
Production
Units
Time

Strategies for Managing

Demand
Shifting demand into other
time periods
Incentives
Sales promotions
Advertising campaigns

Offering
products
or
services with countercyclical demand patterns
Partnering with suppliers
to reduce information
distortion along the supply
chain

Quantitative Techniques For

APP

Pure Strategies
Mixed Strategies
Linear Programming
Transportation
Method
Other Quantitative
Techniques

 Solving aggregate planning problem involves

formulating strategies for meeting demand,
constructing production plans from those strategies,
determining cost and feasibility of each plan, and
selecting the lowest cost plan among the feasible
alternatives.
The effectiveness of the aggregate planning process
is directly related to managements understanding of
the cost variables involved and the reasonableness of
the scenarios tested.

Pure strategies
Pure strategy is varying only one capacity
variable in aggregate planning.
Level and Chase strategies are example of
Pure strategies.

Pure Strategies
Example:

QUARTER
Spring
Summer
Fall
Winter

SALES FORECAST (LB)

80,000
50,000
120,000
150,000

Hiring cost = $100 per worker

Firing cost = $500 per worker
Regular production cost per pound = $2.00
Inventory carrying cost = $0.50 pound per quarter
Production per employee = 1,000 pounds per quarter
Beginning work force = 100 workers

Level Production Strategy

Level production
(50,000 + 120,000 + 150,000 + 80,000)
= 100,000 pounds
4
SALES
FORECAST
80,000
50,000
120,000
150,000

PRODUCTION
QUARTER
PLAN
INVENTORY
Spring
100,000
20,000
Summer
100,000
70,000
Fall
100,000
50,000
Winter
100,000
0
400,000
Cost of Level Production Strategy
(400,000 X $2.00) + (140,00 X $.50) = $870,000

140,00

Chase Demand Strategy

QUARTER

SALES PRODUCTION
FORECAST
PLAN

Spring
Summer
Fall
Winter

80,000
50,000
120,000
150,000

50

80,000
50,000
120,000
150,000

WORKERS WORKERS WORKERS

NEEDED
HIRED
FIRED

80
50
120
150

0
0
70
30

20
30
0
0
100

Cost of Chase Demand Strategy

(400,000 X $2.00) + (100 x $100) + (50 x $500) = $835,000

Mixed Strategy
Mixed strategy is varying two or more capacity
factors to determine a feasible production plan.
Combination of Level Production and Chase
Demand strategies
They can incorporate management policies like
no more than x% of the workforce can be laid off in
one quarter
inventory levels cannot exceed x dollars

Many industries may simply shut down

manufacturing during the low demand season
and schedule employee vacations during that
time

General Linear Programming

(LP) Model

LP gives an optimal solution, but demand and

costs must be linear
Let
Wt = workforce size for period t
Pt =units produced in period t
It =units in inventory at the end of period t
Ft =number of workers fired for period t
Ht = number of workers hired for period t

LP MODEL
Minimize Z =

$100 (H1 + H2 + H3 + H4)

+ $500 (F1 + F2 + F3 + F4)

+ $0.50 (I1 + I2 + I3 + I4)
Subject to

P1 - I1
Demand
constraints

= 80,000(1)

I1 + P2 - I 2

= 50,000(2)

I2 + P3 - I 3
I3 + P4 - I 4

= 120,000

= 150,000

Production

1000 W1 = P1

(5)

constraints

1000 W2 = P2

(6)

1000 W3 = P3

(7)

1000 W4 = P4

(8)

100 + H1 - F1

= W1

(4)

(9)

Work force

W1 + H2 - F2

= W2

(10)

constraints

W2 + H3 - F3

= W3

(11)

W3 + H4 - F4

= W4

(12)

(3)

Transportation Method
When hiring and firing is not the option at that time
transportation method is used
The transportation method gathers all the
information into one matrix and plans production
based on the lowest cost alternatives.

Transportation Method

QUARTER

EXPECTED
DEMAND

REGULAR
CAPACITY

OVERTIME
CAPACITY

SUBCONTRACT
CAPACITY

1
2
3
4

900
1500
1600
3000

1000
1200
1300
1300

100
150
200
200

500
500
500
500

Regular production cost per unit

Overtime production cost per unit
Subcontracting cost per unit
Inventory holding cost per unit per period
Beginning inventory

$20
$25
$28
$3
300 units

Transportation Tableau
PERIOD OF USE
PERIOD OF PRODUCTION

Beginning

2
0

Inventory

300

Regular

600

20

300

23

100

29

1000

100

34

100

37

500

Subcontract

28

31

34

Subcontract
Regular

23

26

1200

25

28

150

31

150

28

31

1300

Overtime

200

20
25
28

Subcontract
4

31

20

Regular

250

500
1300

Overtime

200

Subcontract

500

Demand

900

1500

300

26

28

1200

Capacity

25

Regular

Unused
Capacity

Overtime

Overtime

1600

3000

34

250

23

500
1300

28

200

31

500

20

1300

25

200

28

500
250

Other Quantitative
Techniques
Linear decision rule (LDR)
It is an optimizing technique originally developed
for aggregate planning in a paint factory.
It solves a set of four quadratic equations the
describes major capacity related costs in the
factory: Payroll costs, hiring and firing,
overtime and under time, and inventory costs.

 Search decision rule (SDR)

It is a pattern search algorithm that tries to find the
minimum cost combination of various workforce
levels and production rate.
Any type of cost function can be used. The search
is performed by computer and may involve the
evaluation of thousands of possible solutions, but
optimal solution is not guaranteed.

 Management coefficients model

It uses regression analysis to improve the
consistency of planning decisions.

Techniques like SDR and management

coefficients are often embedded in commercial
decision support systems or expert systems for
aggregate planning.

Hierarchical Nature of
Planning
Items

Production
Planning

Capacity
Planning

Resource
Level

Product lines
or families

Aggregate
production
plan

Resource
requirements
plan

Plants

Individual
products

Master
production
schedule

Rough-cut
capacity
plan

Critical
work
centers

Components

Material
requirements
plan

Capacity
requirements
plan

All
work
centers

Manufacturing
operations

Shop
floor
schedule

Input/
output
control

Individual
machines

Available-to-Promise (ATP)
ATP is the Quantity of items that can be promised
to the customer.
It is the Difference between planned production
and customer orders already received
AT in period 1 = (On-hand quantity + MPS in period 1)
- (CO until the next period of planned
production)
ATP in period n = (MPS in period n)
- (CO until the next period of planned
production)

ATP: Example

ATP: Example (cont.)

ATP: Example (cont.)

Take excess units from April

ATP in April = (10+100) 70 = 40 = 30

ATP in May = 100 110 = -10
=0
ATP in June = 100 50 = 50

Rule Based ATP

Product
Request

Yes

Is the product
available at
this location?
No

Availableto-promise

Yes

Is an alternative
product available
at this location?

No

Allocate
inventory
Yes

Is this product
available at a
different
location?
No

Is an alternative
product available
at an alternate
location?

Yes

No

Allocate
inventory

Capable-topromise date

Is the customer
willing to wait for
the product?

No
Lose sale

Availableto-promise

Yes

Revise master
schedule

Trigger production

Capable to Promise
When product is not available then system
proposes a capable to promise date, that is
subject to customer approval.
Capable to promise is the quantity of items
that can be produced and made available at
later date.

Aggregate Planning for Services

1.
2.
3.
4.

Most services cant be inventoried

Demand for services is difficult to predict
Capacity is also difficult to predict
Service capacity must be provided at the
appropriate place and time
5. Labor is usually the most constraining
resource for services

Yield Management

Yield Management
(cont.)

Yield Management:
Example
NO-SHOWS

PROBABILITY

P(N < X)

0
1
2
3

.15
.25
.30
.30

.00
.15
.40
.70

Optimal probability of no-shows

Cu
75
P(n < x)
=
= .517
75 + 70
Cu + Co

Hotel should be overbooked by two rooms

.517