Aggregate Production Planning

• Three levels of planning that concern operations manager:

1. Long range planning - Strategic decisions (introduce new products
or processes, locating of facilities).
2. Short term planning – scheduling
3. Intermediate planning or Aggregate planning.
• Structuring of general plan for responding to forecasted demand
through some combination of work force, output, and inventory
loadings.
• Macro-approach to the development of a production plan.
• Allows upper level management to make decisions regarding the use
of resources without getting into the details of daily schedules and
job assignments.
 Nature of Aggregate Production Planning
• To describe the formulation of strategies by which capacity can be made to
satisfy demand in a most economical way during specific time period. (time
period – up to a year into future.)
• Closely related to other corporate functions:
Budgeting – Based on aggregate output, size of work force, inventory
control and purchasing level.
Personnel planning - Aggregate production planning results in hiring,
firing and overtime decisions.
Marketing function – supply of products and services is determined
through such planning, create alternatives to supply forecasted demand.
• While aggregate planning is a primary responsibility of the management
department, it requires cooperation and coordination of many other
corporate departments.
 Decision Options
Formulation of strategies by which capacity can be made to satisfy
demand in a most economical way involves various decision
options.
• Those that modify the demand for products and services.
• Those that modify the supply of products and services.
 Decision Options
Modify the demand for products and services
• Differential Pricing
• Promotion
• Creation of backlogs
• Development of complementary products and services
Modify the supply of products and services
• Hiring and laying-off of employees
• Overtime and shorter working days
• Part-time labour
• Carrying inventory
• Subcontracting
Two alternative production schedules for meeting demand
Alternative 1: Constant work force level, production output rate is greater than the
expected demand rate in the earlier production periods, cumulative production will
exceed cumulative demand resulting in significant inventory carrying cost.
Alternative 2: Produce to demand such that inventory costs are minimized.
Constantly adjusting the work force level or paying significant overtime cost
during the high demand periods.
 Aggregate Production Planning Costs
• Hiring and laying-off of employees costs
• Overtime and shorter work week costs
• Inventory carrying costs
• Subcontracting costs
• Part-time labour costs
• Cost of backorders.
 Aggregate Production Planning Strategies
• Level the size of the workforce
The work force is kept constant over time, any variation in
demand is accommodated by using inventories, overtime and part-
time workers, and by subcontracting, as well as by advertising and
promoting to influence the demand.
• Chase the demand
Work force is changed continuously to meet the variation
in the demand, inventory is kept to a minimum. Overtime, part-
time workers, and subcontracting are also kept minimum.
• Mixed strategy (any combination of two basic strategies).
 Aggregate Production Planning
Problem: The Rival manufacturing company, a manufacturer of can openers, is
constructing an aggregate plan for the next twelve months. Although serveral
sizes of openers are produced at the rival plant, management has decided to use
the number of can openers as the aggregate measure of capacity.
Table 1 depicts the fluctuating demand that is marked by a well-
defined seasonal pattern with a cycle of 12 months. Management has decided to
maintain always some extra openers in stock to hedge against unforeseen
increases in demand. This stock is termed safety stock and is set to be 25
percent of the forecasted demand. The beginning inventory for the month of
January is 100 units. The number of working days are given, excluding
weekends, holidays and shut-downs for maintenance.
 Aggregate Production Planning
The management of rival manufacturing company would like to consider three
aggregate planning strategies:
Strategy 1: Produce each month an amount equal to the exact production
requirements, by varying the size of the work force over regular hours.
Strategy 2: Maintain the work force at a level corresponding to the average
monthly production requirement.
Strategy 3: Reduce the size of the work force to an arbitrary number – say, 10 of
workers, and subcontract excess production required.
To evaluate the 3 strategies, Rival’s management collected the following
required costs and resource data:
Variable Production cost $200/unit
Inventory costs $3/unit/month
Hourly wage $12/hour
Overtime wage rate $18/hour
 Aggregate Production Planning
Stock out cost $10/unit/month
Subcontracting cost $212/unit
Hiring and training costs $1000/worker
Layoff costs $1800/worker
Labour content 10/hours/unit
Number of workers currently employed 40/workers
Input Data
Month Forecasted Demand Monthly Working Days
January 1000 20
February 700 19
March 500 21
April 300 22
May 500 21
June 900 20
July 1000 20
August 1200 19
September 1400 21
October 1500 22
November 1300 21
December 1200 20
Aggregate Production Planning
Strategy I
Strategy I
 Strategy II
Work force size required is,
[Annual Production requirements x Hours per unit] /
[Total working days x 8 Hours per day]
= [11,750 x 10] / [246 x 8] = 59.7 = 60 workers.
Strategy II
Strategy II
Strategy III
Tradeoff of the 3 aggregate production plan strategies