AGGREGATE PRODUCTION

PLANNING (APP)
Learning Objectives
1. Definition and concept of APP
2. Objectives of APP
3. Aggregate Planning Strategies
4. Chase and Level Strategies
5. Applications of Level and Chase
Strategies
6. Relevant costs in APP
Introduction
Most of the manufactures face tough decisions when
trying to schedule products such as snack foods, and air
conditioners, the demand depend on seasonal variation.
Demand for particular product is not stable all the time.
Product demand fluctuates from month to month.
The managers need to plan ahead of time and anticipate
the appropriate amounts of products to produce.
Developing plans that minimize costs connected with
such forecasts is aggregate planning, one of the main
functions of an operations manager.
Definition
Aggregate planning (APP) is concerned with determining the
quantity and timing of production for immediate
future(usually 3 to 18 months into future) Heizer & Render
2011

It also planning method, which evaluates future work

schedule for one or more products so that forecasted sales
can be satisfied.

Operations manager try to determine the best way to meet

forecasted demand by adjusting production rates, labor
levels, inventory levels, overtime work, subcontracting rates
and other controllable variables.
Objectives of APP
1. To develop a feasible production plan to
achieve a balance of expected demand and
supply.
2. To meet forecasted demand while minimizing
costs over the planning period.
3. To satisfy market or customer demand for
each respective period.
Aggregate Planning Strategies
a) Vary workforce level by hiring and layoff
- This strategy requires for the number of productive workers
vary according to the periodic output requirements. More
workers are hired during the peak demand and laid off during
low season.

b) Constant workforce, vary overtime only

- Managers adopt a strategy of retaining some constant
number of workers and vary working hours providing overtime
during peak demand periods.

c) Constant workforce, vary overtime and inventory

- Maintain current workforce level thus no additional workers
will be hired. Workforce level and production rates are
constant. Overtime is done during the months when inventory
is sufficient to absorb demand fluctuations.
d) Constant workforce, changing the level of inventory
- Inventories may also be used to anticipate and absorb changes
in demand. Workforce level and production rates are constant
but carry sufficiently large amount of factory.

e) Constant workforce level uses subcontractor

- This strategy maintains a constant workforce size but uses the
subcontractor to cater the shortages.

f) Constant workforce, varying inventory and allowing backordering

during high demand
- In certain months the expected demand cannot be met but can
filled during months when demand is low. Back orders are orders
for goods/services that a firm accepts but is unable to fill at the
moment. Back ordering only works if customers are willing to wait
without loss of their goodwill or order. There is delay in the
delivery of goods or services to customer.
 Mixing options to develop a plan
1. Chase strategy

- Produce exactly based on Dd fluctuation. To achieve

output rates for each period that match the demand
forecast for that period.
- Example: the operations manager can vary workforce
levels by hiring or laying off or can vary production by
means overtime, idle time, part time employees or
subcontracting.
- Many service organizations favor the chase strategy
include education, hospitality and construction.
2. Level strategy

- Maintain constant workforce and produce the same

amount every period (based on capacity).
- An aggregate plan in which production is uniform form
period to period. Maintaining a constant output rate,
production rate or workforce level over the planning
horizon.
- Example: Firms like Toyota and Nissan keep production
at uniform levels and may let the finished goods
inventory vary to buffer the difference demand and
production or find alternative work for employees.
- A stable workforce leads to a better quality product,
less turnover and absenteeism and more employee
commitment to corporate goals.
Relevant Cost in Aggregate Planning
a) Hiring Costs the cost of hiring new employees during
the peak demand.
b) Layoff costs the cost of laying employees during the
low demand
c) Overtime cost the cost of doing overtime to meet the
shortage
d) Inventory shortage cost (i.e inventory holding/carrying
costs)- the cost of carrying excess unit
e) Shortage cost the cost incurred if the manufactured
could not meet the demand or asked customer to back
order
f) Regular production costs- the cost of producing the
amount of output at a particular time with the available
resources
g) Cost of subcontracting the cost of subcontracting the
shortages to another manufacturer
h) Stock out each time we run out of raw material or
finished goods inventory, costs may be incurred, these
costs include losts sales & dissatified customer.
Aggregate Strategies relating to Exam
1. Varying workforce level to meet exact demand.
2. Maintaining a constant workforce level, varying
overtime only.
3. Maintaining a constant workforce level, varying
overtime.
4. Maintaining a constant workforce level, varying
overtime and building up inventory.
5. Maintaining a constant workforce level, varying
overtime, building up inventory and
subcontracting if necessary.
 Question
Opening inventory is 300 units. Apart from
Forecast
Month the contract, the normal monthly forecasted
Demand
demand from other buyers is 200 units.
January 11000
Additional information:
February 11500
March 12400 Hiring cost : RM500 per wkr
Lay-off cost : RM700 per wkr
April 12000
Current workforce : 35 workers
May 10800 Standard output : 30 minutes
June 11600 Working hour : 7 hour
Regular labour cost : RM 3 per hour
Overtime cost : RM 4 per hour
Overtime unit capacity : Maximum of 300
units per month
Inventory holding costs : RM 5 per unit
Subcontract costs : RM 4 per unit
Stock-out cost : RM 2 per unit
Working days : 24 days
 Strategy 1 : Varying workforce level to meet
exact demand
Inventory = 300 Mthly Dd = 200
Monthly standard output (capacity per worker)= Hiring cost : RM500
No. of days per month x Daily standard output Lay-off cost : RM700
Current workforce : 35 workers
Standard output : 30 minutes
Capacity per worker = 60 mins x 7 hrs x 24 days Working hour : 7 hour
Per month 30 mins Working days : 24 days
= 336 units per worker per months

Forecast Current
Month Required Workers Hire Layoff
Demand Workers
11000+200-
Jan 35 10900/336 = 32 - 3
300 = 10900
Feb 11700 32 11700/336 = 35 3 -
March 12600 35 12600/336 = 38 3 -
April 12200 38 12200/336 = 36 2
May 11000 36 11000/336 = 33 - 3
June 11800 33 11800/336 = 35 2 -
Total 70200 8 8
 Total Costs Hiring cost : RM500
Lay-off cost : RM700
Regular Labour Cost : RM3/hr
Standard output : 30 minutes

RM
1. Regular Production 70200 x RM3/hr x (30 60)hr 105300
Cost
2. Hiring Cost 8 workers x RM500/wkr 4000
3. Lay-off Cost 8 workers x RM700/wkr 5600
Total Costs 114900

Regular Production Costs=

Total Units Produced x Regular Cost per hour x Standard Output per hour
 Strategy 2 : Constant workforce level, varying overtime
only
Units Produces =
(Number of workers) X (Working Days per period) X Standard Output per day

Capacity per month = 60 mins x 7 hrs x 24 days x 35 workers

Current workforce : 35 workers
30 mins Standard output : 30 minutes
= 11760 units per month Working hour: 7 hour
Working days : 24 days
Overtime unit capacity: Max 300

Forecast Stock-
Month Capacity Excess Shortage Inventory OT
Demand Out
11000+200
Jan -300 = 11760 860 860
10900
Feb 11700 11760 60 60
March 12600 11760 840 300 540
April 12200 11760 440 300 140
May 11000 11760 760 760
June 11800 11760 40 40
Total 70560 1680 640 680
Total Costs Regular labour cost: RM 3 per hour
Inventory holding costs: RM 5 per unit
Overtime cost: RM 4 per hour
Stock-out cost : RM 2 per unit

RM
1. Regular Production 70560 x RM3/hr x (30 60)hr 105840
Cost
2. Inventory holding 1680 units x RM5/unit 8400
Cost
3. Over-time Cost 640 units x RM4/hr x 1280
(0.5hr/unit)
4. Stock-out Cost 680 units x RM2/unit 1360
Total Costs 116880

Regular Production Costs=

Total Units Produced x Regular Cost per hour x Standard Output per hour
 Strategy 3 : Constant workforce level,
varying overtime
Units Produces =
(Number of workers) X (Working Days per period) X Standard Output per day
Capacity per month = 60 mins x 7 hrs x 24 days x 35 workers
30 mins
= 11760 units per month
Forecast Stock-
Month Capacity Excess Shortage Inventory OT
Demand Out
11000+200-
Jan 300 = 11760 860 860
10900
Feb 11700 11760 60 60
March 12600 11760 840 300 480
April 12200 11760 440 300 140
May 11000 11760 760 760
June 11800 11760 40
Total 70560 1680 600 620
Total Costs Regular labour cost
Inventory holding costs
Overtime cost
: RM 3 per hour
: RM 5 per unit
: RM 4 per hour
Stock-out cost : RM 2 per unit

RM
1. Regular Production 70560 x RM3/hr x (30 60)hr 105840
Cost
2. Inventory holding 1680 units x RM5/unit 8400
Cost
3. Over-time Cost 600 units x RM4/hr x 300
(0.5hr/unit)
4. Stock-out Cost 620 units x RM2/unit 1240
Total Costs 115780

Regular Production Costs=

Total Units Produced x Regular Cost per hour x Standard Output per hour
 Strategy 4 : Constant workforce level, varying
overtime and building up inventory
Units Produces =
(Number of workers) X (Working Days per period) X Standard Output per day

Capacity per month = 60 mins x 7 hrs x 24 days x 35 workers

30 mins
= 11760 units per month
Forecast Stock-
Month Capacity Excess Shortage Inventory OT
Demand Out
11000+200-
Jan 300 = 11760 860 860
10900
Feb 11700 11760 60 920
March 12600 11760 840 80
April 12200 11760 440 300 60
May 11000 11760 760 760
June 11800 11760 40 720
Total 70560 3340 300 60
Total Costs Regular labour cost
Inventory holding costs
Overtime cost
: RM 3 per hour
: RM 5 per unit
: RM 4 per hour
Stock-out cost : RM 2 per unit

RM
1. Regular Production 70560 x RM3/hr x (30 60)hr 105840
Cost
2. Inventory holding 3340 units x RM5/unit 16700
Cost
3. Over-time Cost 300 units x RM4/hr x 150
(0.5hr/unit)
4. Stock-out Cost 60 units x RM2/unit 120
Total Costs 122,810

Regular Production Costs=

Total Units Produced x Regular Cost per hour x Standard Output per hour
Strategy 5 : Constant workforce level, varying, overtime,building
up inventory and subcontracting if necessary
Units Produces =
(Number of workers) X (Working Days per period) X Standard Output per day

Capacity per month = 60 mins x 7 hrs x 24 days x 35 workers

30 mins
= 11760 units per month
Forecast Sub- Stock-
Month Capacity Excess Shortage Inventory OT
Demand contract Out
11000+200-
Jan 300 = 11760 860 860
10900
Feb 11700 11760 60 920
March 12600 11760 840 80
April 12200 11760 440 300 60
May 11000 11760 760 760
June 11800 11760 40 720
Total 70560 3340 300 60
 Regular labour cost : RM 3 per hour

Total Costs Inventory holding costs

Overtime cost
Subcontract costs
: RM 5 per unit
: RM 4 per hour
: RM 4 per unit
Stock-out cost : RM 2 per unit

RM
1. Regular Production 70560 x RM3/hr x (30 60)hr 105840
Cost
2. Inventory holding 3340 units x RM5/unit 16700
Cost
3. Over-time Cost 300 units x RM4/hr x 150
(0.5hr/unit)
4. Subcontract Cost 60 units x RM4/unit 240
Total Costs 122,930

Regular Production Costs=

Total Units Produced x Regular Cost per hour x Standard Output per hour
Summary of Total Costs for all strategies

Strategy Total Cost

1 114900
2 116880
3 115780
4 122,810
5 122,930
Exercise 1
Mattel (M) Sdn Bhd a major supplier of high quality dolls has forecasted the demand for
Barbie dolls for the Malaysian market as follows:

Season Quantity Season Quantity

(Units) (Units)
Chistmas 10000 Thaipusam 7000
Chinese New 8000 Hari Raya 12000
Year Aidilfitri

Inventory at the beginning of Christmas season is 500 units and Mattel is currently
employing 30 workers. One season is assumed to last for 60 days. Other relevant costs
are as follows:
Hiring costs : RM100 per person
Layoff costs : RM200 per person
Inventory Holding Costs : RM 5 per unit
Overtime Rate : RM 8 per hour
Regular rate : RM 5 per hour
Assume the productivity is 2 hours per unit, with 8 hour per day and 60 days per
season.
Develop a production plan strategy of using constant workforce , vary overtime.
Calculate the plan.
Exercise 2
Megah Holding produces dining tables for overseas market. The company
wants to develop an aggregate production plan for the period of January
June 2013. The estimated demands are as follows;
Month Forecasted demand (units)
January 6500
February 5000
March 6200
April 6400
May 5900
June 5800
The inventory at the beginning of January is zero. To anticipate uncertainty in
demand, Megah Holding would like an extra production of 600 units each
month. The overtime capacity is 500 units per month. Additional capacity is
available by sub- contracting to anaother local manufacturer at a cost of RM
8 per unit.

Other information:
Number of working days per month : 25 days
Regular rate : RM 6 per hour
Overtime rate : RM 9 per hour
Number of workers : 16
Inventory carrying costs per unit : RM 1.50
Hiring costs per worker : RM 300
Layoff costs per worker : RM 200
Standard output : 2 units per hour
Working hours : 8 hours

Develop an aggregate production plan by using constant workforce; vary

overtime strategy and subcontracting for the forecasted demand variations.
Determine the production costs for the period of January June 2012
Exercise 3
ADZ Co. supplies aluminium alloy parts to the automative industry. The
forecasted demand (in units) for the parts over the next six month planning
horizon is:
Month Forecated Demand
(Units)

January 5500

February 4500

March 5000

April 6500

May 6000

June 5750
 Use the following information to develop an aggregate plan:

Current workforce level : 20 workers

Labor hours per unit : 48 minutes
Working hours per day : 8 hours
Regular wage date : RM 5 per hour
Overtime rate : 120% of regular wage rate
Holding Cost : RM 0.50 per unit per month
Hiring Cost : RM 400 per worker
Lay off cost : RM 500 per worker

a) Develop an aggregate production plan using vary workforce strategy to

meet forecasted demand for the next six month period
b) Calculate the total costs for the plan.