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 organization’s resources to satisfy expected demand.

Types of production plan

Type of plans

Planning objectives

Planning inputs

Planning horizon

Decision variables

Planning outputs

Long-term plan

To achieve specific organization-al objectivesTo enhance long-term viability and development

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

5-10 years Long-term capacity resource allocation for: products, Processes and markets

Plans 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 objectives

Planning inputs

Planning horizon

Decision variables

Planning outputs

Medium term plan

(or Aggregate plan)

To make the most effective use of available capacity through existing resources

Long-term plansLimits on present capacityPeriod by period annual demand forecastFeasible production alternatives and costs

1-18 months

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

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

Types of production plan

Type of plans

Planning objectives

Planning inputs

Planning horizon

Decision variables

Planning outputs

Short-term plan

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

Aggregate production planOrders receivedDesired delivery times

1-30 days Size of work-forceProduction rateSequencing of orders

Production scheduleAssigning orders to specific Departments, Shifts, Personnel, Equipments etc.

Planning Sequence

Business PlanEstablishes operationsand capacity strategiesEstablishes operationsand capacity strategies

Aggregate plan Establishesoperations capacity

Establishesoperations capacity

Master schedule Establishes schedulesfor specific products

Establishes schedulesfor specific products

Corporatestrategies

and policies

Economic,competitive,and political conditions

Aggregatedemand

forecasts

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 APSpecify 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 firm’s 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 foran 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

Pricing

Promotion

Back orders

New demand

Demand Options

Hire and layoff workers Overtime/under time Part-time workers Inventories Subcontracting

Capacity Options

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 APPTechniques:

Trial and error method Linear programmingProcedure: 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 method

Planners of a company have obtained information regarding the forecasted demand of a product as follows:

Period 1 2 3 4 5 6 TotalForecast 200 200 300 400 500 200 1800

Costs Regular time: $2/unitOvertime: $3/unitSubcontract: $6/unitInventory: $1/unitBackorder:$5/unitThey 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 methodSuppose that the regular output rate will drop to 290 units per

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:

1. 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.

2. 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 Demand ForecastJanuary 1,600February 3,000

March 3,200April 3,800May 2,200June 2,200

Example 3: Aggregate Planning

Item CostMaterials $10/unitInventory holding cost $2/unit/monthMarginal cost of a stockout $5/unit/monthHiring and training costs $300/workerLayoff cost $500/workerLabor hours required 4/unitRegular time cost $4/hourOver time cost $6/hourCost of subcontracting $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)

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Aggregate Planning (Define Constraints Linking Variables)

Workforce size for each month is based on hiring and layoffs

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Aggregate Planning (Constraints) Production for each month cannot exceed

capacity

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Aggregate Planning (Constraints)

Inventory balance for each month

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Aggregate Planning (Constraints)

Over time for each month

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