Aggregate Planning

By
Dr. Debadyuti Das

Aggregate Planning: An
overview

Intermediate range capacity planning that

usually covering 2 to 24 months (or 1 to 18
months)
Goal is to achieve a production plan that will
effectively utilize the organizations resources
to satisfy expected demand.

Types of production plan

Type of Planning
plans
objectives

Planning
inputs

Planning Decision
horizon
variables

Planning
outputs

Long-term
plan

Corporate

5-10 years

Plans

To

achieve
specific
organizational objectives
To enhance
long-term
viability and
development

strategies &
policies,
Demand
forecasts,
Economic,
technological &
political scenario,
Available
capital etc.

Long-term
capacity
resource
allocation for:
products,
Processes and
markets

for
capacity
expansion (or
contraction)
Plans for
- new products,
-new technologies,
-new markets,
-new plants and
their location.

Types of production plan

Type of
plans

Planning
Planning
objectives inputs

Planning Decision
horizon variables

Planning
outputs

Medium
term plan
(or
Aggregate
plan)

To

1-18
months

Aggregate
production plans
specifying how
demand will be
met from existing
productive
resources

make the
most effective
use of
available
capacity
through
existing
resources

Long-term

plans
Limits on
present
capacity
Period by
period annual
demand
forecast
Feasible
production
alternatives and
costs

Levels of use
for available
production
alternatives:
Work-force
size,
Production
rate,
Inventory,
Subcontracting

Types of production plan

Type of Planning
plans
objectives

Planning
inputs

Planning Decision
horizon variables

Planning
outputs

Shortterm plan

Aggregate

1-30 days

Production

To

ensure
customer
satisfaction
through
prompt
delivery times
To achieve
maximum
effectiveness
from the use
of production
factors

production plan
Orders
received
Desired
delivery times

Size

of work-

force
Production
rate
Sequencing of
orders

schedule
Assigning orders
to specific
Departments,
Shifts, Personnel,
Equipments etc.

Planning Sequence
Corporate
strategies
and policies

Economic,
competitive,
and political
conditions

Aggregate
demand
forecasts

Business Plan

Establishes operations
and capacity strategies

Aggregate plan

Establishes
operations capacity

Master schedule

Establishes schedules
for specific products

Aggregate planning
Aggregate planning:

process by which a company determines levels of

capacity, production, subcontracting, inventory,
stock outs, and pricing over a specified time
horizon
goal is to maximize profit
decisions made at a product family (not SKU)
level
time frame of 1 to 18 months
how can a firm best use the facilities it has?

Operational parameters of
AP
Specify operational parameters over the time
horizon:

production rate
workforce
Overtime/under time
machine capacity level
subcontracting
backlog
inventory on hand

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 profit over the planning
horizon
Specify the planning horizon (typically 1-18 months)
Specify the duration of each period
Specify key information required to develop an
aggregate plan

Information Needed for

an Aggregate Plan

Demand forecast in each period

Production costs

labor costs, regular time ($/hr) and overtime ($/hr)

subcontracting costs ($/hr or $/unit)
cost of changing capacity: hiring or layoff ($/worker) and cost
of adding or reducing machine capacity ($/machine)

Labor/machine hours required per unit

Inventory holding cost ($/unit/period)
Stock out or backlog cost ($/unit/period)
Constraints: limits on overtime, layoffs, capital
available, stockouts and backlogs

Outputs of Aggregate Plan

Production quantity from regular time, overtime, and

subcontracted time: used to determine number of workers
and supplier purchase levels
Inventory held: used to determine how much warehouse
space and working capital is needed
Backlog/stockout quantity: used to determine what
customer service levels will be
Machine capacity increase/decrease: used to determine if
new production equipment needs to be purchased
A poor aggregate plan can result in lost sales, lost profits,
excess inventory, or excess capacity

Aggregate Planning
Strategies

Proactive

Alter demand to match capacity

Reactive
Alter capacity to match demand
(Chase strategy: using capacity as the lever
Level strategy: using inventory as the lever
Time flexibility Strategy: using utilization as the lever)

Mixed

Some of each

Demand Options

Pricing

Promotion

Back orders

New demand

Capacity Options

Hire and layoff workers

Overtime/under time
Part-time workers
Inventories
Subcontracting

Chase Strategy

Production rate is synchronized with demand by

varying machine capacity or hiring and laying
off workers as the demand rate varies
However, in practice, it is often difficult to vary
capacity and workforce on short notice
Expensive if cost of varying capacity is high
Negative effect on workforce morale
Results in low levels of inventory
Should be used when inventory holding costs
are high and costs of changing capacity are low

Time Flexibility Strategy

Can be used if there is excess machine capacity

Workforce is kept stable, but the number of hours worked is
varied over time to synchronize production and demand
Can use overtime or a flexible work schedule
Requires flexible workforce, but avoids morale problems of
the chase strategy
Low levels of inventory, lower utilization
Should be used when inventory holding costs are high and
capacity is relatively inexpensive

Level Strategy

Maintain stable machine capacity and workforce

levels with a constant output rate
Shortages and surpluses result in fluctuations in
inventory levels over time
Inventories are built up in anticipation of future
demand or backlogs are carried over from high
to low demand periods
Better for worker morale
Large inventories and backlogs may accumulate
Should be used when inventory holding and
backlog costs are relatively low

Fundamental Tradeoffs in
Aggregate Planning

Capacity (regular time, overtime, subcontract)

Inventory

Backlog / lost sales

Techniques and general

procedure
for
APP
Techniques:
Trial and error method
Linear programming
Procedure:
Determine demand for each period.
Determine capacities (regular time, O/T, Subcontracting)
for each period.
Identify company policies
Determine unit costs for regular time, O/T, subcontracting,
inventories, back orders, layoffs and other relevant costs.
Develop alternative plans and compute the costs for
each.
Select the one that best satisfies the objectives.

Example 1: Trial & Error

Planners of a company have obtained information regarding the forecasted
demand of a product as follows:
method
Period 1
Forecast

2
200

3
200

4
300

5
400

6
500

Total
200

1800

Costs
Regular time: $2/unit
Overtime:
$3/unit
Subcontract:
$6/unit
Inventory:
$1/unit
Backorder:
$5/unit
They now want to evaluate a plan that calls for a steady rate of regular-time
output, mainly using inventory to absorb the uneven demand but allowing
some backlog. Overtime and subcontracting are not used because they want
steady output. They intend to start with zero inventory on hand in the first
period. Prepare an aggregate plan and determine its cost using the
preceding information. Assume a level output rate of 300 units per period
with regular time. Note that the planned inventory is zero. There are 15
workers, each can produce 20 units per period.

Example 2: Trial & Error

method
Suppose that the regular output rate will drop to 290 units per

1.

2.

period due to an expected change in production

requirements. Costs will not change. Prepare an
aggregate plan and compute its total cost for each of these
alternatives:
Use overtime at a fixed rate of 20 units per period as
needed. Plan an ending inventory of zero for period 6.
Backlogs cannot exceed 90 units per period.
Use subcontracting at a maximum rate of 50 units per
period; the usage need not be the same in every period.
Have an ending inventory of zero in the last period. Again
backlogs cannot exceed 90 units in any period. Compare
these two plans.

Example 3: LP
Month
January
February
March
April
May
June

Demand Forecast
1,600
3,000
3,200
3,800
2,200
2,200

Example 3: Aggregate
Planning
Item
Materials
Inventory holding cost
Marginal cost of a stockout
Hiring and training costs
Layoff cost
Labor hours required
Regular time cost
Over time cost
Cost of subcontracting

Cost
$10/unit
$2/unit/month
$5/unit/month
$300/worker
$500/worker
4/unit
$4/hour
$6/hour
$30/unit

Aggregate Planning
(Define Decision Variables)

Wt = Workforce size for month t, t = 1, ..., 6

Ht = Number of employees hired at the beginning of month t,

t = 1, ..., 6
Lt = Number of employees laid off at the beginning of month t,
t = 1, ..., 6
Pt = Production in month t, t = 1, ..., 6
It = Inventory at the end of month t, t = 1, ..., 6
St = Number of units stocked out at the end of month t,
t = 1, ..., 6
Ct = Number of units subcontracted for month t, t = 1, ..., 6
Ot = Number of overtime hours worked in month t, t = 1, ..., 6

Aggregate Planning
(Define Objective Function)
6

t 1

t 1

Min 640W t 300 H t

6

t 1

t 1

t 1

500 Lt 6 Ot 2 I t
6

t 1

t 1

t 1

5 S t 10 Pt 30 C t

Aggregate Planning (Define

Constraints Linking
Workforce size for each month is based
Variables)
on hiring and layoffs

W t W t 1 H t Lt, or
W t W t 1 H t Lt 0
for t 1,...,6, where W 0 80.

Aggregate Planning
(Constraints)

Production for each month cannot exceed

capacity

40

4
,
P t W t Ot
40W t Ot 4 Pt 0,
for t 1,...,6.

Aggregate Planning
(Constraints)

Inventory balance for each month

I t 1 Pt C t Dt S t 1 I t S t ,
I t 1 Pt C t Dt S t 1 I t S t 0,
for t 1,...,6,where I 0 1,000,
S 0 0,and I 6 500.

Aggregate Planning
(Constraints)

Over time for each month

Ot 10W t,
10W t Ot 0,
for t 1,...,6.