AGGREGATE

PLANNING
OMII, Term III, Sessions 8-10
Harpreet Kaur
Aggregate Planning: Definition

To determine the quantity and timing of production by minimizing

cost for the intermediate future (generally 6 - 18 months); called the
“planning horizon.”

Demand is subjected to fluctuations from one period to another, fluctuating

production rate to meet demand is not always feasible and cost efficient solution
Meeting Demand Strategies

◦ Adjusting capacity
◦ Resources 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
Key considerations for AP
◦ Should inventories be used to absorb changes in demand during the planning
period?
◦ Should changes be accommodated by varying the size of the workforce?
◦ Should overtime or undertime absorb fluctuations?
◦ Should subcontractors be used on fluctuating orders so that a stable workforce can
be maintained?
◦ Should prices or other factors be changed to influence demand?
Hierarchy of Decisions

Marketplace Product Research

and decisions
and
demand technology

Process planning
and capacity
decisions
Demand
forecasts,
orders
Workforce Raw
materials
Aggregate available
plan for
production Inventory
on
External hand
capacity
Master (subcontractors)
production
schedule and
MRP
systems

Detailed work
schedules
Strategies for Adjusting Capacity

◦ Level production
◦ Producing at a constant rate and using inventory to
absorb fluctuations in demand
◦ Chase demand
◦ Hiring and firing workers to match demand
Strategies for Adjusting Capacity

◦ Overtime and under-time

◦ Increase or decrease working hours
◦ Subcontracting
◦ Let outside companies complete the work
◦ Part-time workers
◦ Hire part-time workers to complete the work
◦ Backordering
◦ Provide the service or product at a later time period
Level Production
Chase Demand
Strategies for Managing Demand

◦ Shifting demand into other time periods

◦ Incentives
◦ Sales promotions
◦ Advertising campaigns
◦ Offering products or services with counter-cyclical demand patterns
◦ Partnering with suppliers to reduce information distortion along the
supply chain
 Quantitative Techniques For AP

◦ Pure Strategies
◦ Mixed Strategies
◦ Linear Programming
 Example:
ABC a manufacturer of roofing tiles has developed monthly Forecasts for
roofing tiles and presented the period January-June in the table.

To represent the projected demand, ABC also draws a graph that charts the
daily demand each month. The dotted line across the chart represents the
production rate required to meet average demand which is computed by
dividing the total expected demand by number of production days.
Table : Expected demand and number of production days.

Production Demand Per Day

Month Expected Demand Days (computed)
Jan 900 22 41

Feb 700 18 39

Mar 800 21 38

Apr 1,200 21 57

May 1,500 22 68

June 1,100 20 55

6,200 124
Cost Information
Inventory carrying cost $ 5 per unit per month
Subcontracting cost per unit $10 per unit
Average pay rate $ 5 per hour ($40 per day)
$ 7 per hour
Overtime pay rate (above 8 hours per day)
Labor-hours to produce a unit 1.6 hours per unit
Cost of increasing daily production rate $300 per unit
(hiring and training)
Cost of decreasing daily production rate $600 per unit
(layoffs)
 Average Total expected demand
requirement =
Number of production days
6,200
= = 50 units per day
124 Forecast demand
Production rate per working day
70 – Level production using
average monthly forecast
60 – demand

50 –

40 –

30 –

Jan Feb Mar Apr May June = Month

0 –      
22 18 21 21 22 20 = Number of
working days
Possible Strategy 1
Monthly
Cost Information
Production at Demand Inventory Ending
Month carry
Inventory 50 Units
cost per Day Forecast $ 5Change
per unit per Inventory
month
Jan 1,100
Subcontracting cost per unit 900 +200
$10 per unit 200
Feb pay rate
Average 900 700 +200
$ 5 per 400day)
hour ($40 per
Mar 1,050 800 +250
$ 7 per hour 650
Overtime pay rate (above
Apr 1,050 1,200 -1508 hours per500day)
Labor-hours to produce a unit 1.6 hours per unit
Mayof increasing
Cost 1,100daily production1,500
rate $300 -400
per unit 100
(hiring and training)
June 1,000 1,100 -100 0
Cost of decreasing daily production rate $600 per unit 1,850
(layoffs)
Total units of inventory carried over from one t workforce
Table 13.3 month to c
the
– o n stan= 1,850 units
next
Plan 1
Workforce required to produce 50 units per day = 10 workers
 Monthly
Costs
Cost Information
Production at Calculations
Demand Inventory Ending
Inventory
Month carry
Inventory carrying
50 Units
cost per Day Forecast (= 1,850
perunits
$ 5Change carried
unit per monthx $5
Inventory
Jan 1,100 $9,250 900 per $10unit)
+200
per unit 200
Subcontracting cost per unit
Regular-time
Feb pay rate labor
900 700 (= 10
$ 5 workers
+200
per x $40
hour ($40 per
400
per day)
Average
49,600 day x 124 days)
Mar 1,050 800 +250
$ 7 per hour 650
Other costs
Overtime pay (overtime,
rate
Apr layoffs,
hiring, 1,050 1,200 (above -1508 hours per 500day)
Labor-hours to produce a unit 0
subcontracting) 1.6 hours per unit
May
Cost
Total of 1,100
increasing
cost daily production 1,500
rate -400unit
$300 per 100
(hiring and training)
June 1,000 $58,8501,100 -100 0
Cost of decreasing daily production rate $600 per unit 1,850
(layoffs)
Total units of inventory carried over from one
Table 13.3 month to the next = 1,850 units
Workforce required to produce 50 units per day = 10 workers
 Possible Strategy 1
7,000 –

6,000 – Reduction
of inventory

Cumulative demand units

5,000 – Cumulative level 6,200 units
production using
average monthly
4,000 – forecast
requirements
3,000 –

2,000 – Cumulative forecast

requirements
1,000 – Excess inventory

–
Jan Feb Mar Apr May June
Possible Strategy 2
Subcontracting

Demand Per Day

Month Expected Demand Production Days (computed)
Jan 900 22 41
Feb 700 18 39
Mar 800 21 38
Apr 1,200 21 57
May 1,500 22 68
June 1,100 20 55
6,200 124

Minimum requirement = 38 units per day

 Possible Strategy 2
Forecast demand

Production rate per working day

70 –
Level production
60 – using lowest
monthly forecast
demand
50 –

40 –

30 –

0 –
Jan Feb Mar Apr May June = Month
     
22 18 21 21 22 20 = Number of
working days
Possible Strategy 2
Cost Information
In-house production = 38 units per day
Inventory carry cost $ 5 per unit per month
Subcontracting cost per unit
x$10
124 days
per unit
Average pay rate
= 4,712 units
$ 5 per hour ($40 per day)
$ 7 per hour
Overtime Subcontract
pay rate units = 6,200 - 4,712
(above 8 hours per day)
Labor-hours to produce a unit = 1,488 units
1.6 hours per unit
Cost of increasing daily production rate $300 per unit
(hiring and training)
Cost of decreasing daily production rate $600 per unit
(layoffs)
Possible Strategy 2
Cost Information
Inventory carry cost $ 5 per unit per month
In-house
Subcontracting production
cost per unit = 38
$10 units
per unitper day
Average pay rate x$ 5124 days($40 per day)
per hour

Overtime pay rate

= 4,712 units
$ 7 per hour
(above 8 hours per day)
Costs Subcontract
Labor-hours units
to produce a unit = Calculations
6,200 - 4,712
1.6 hours per unit
Regular-time labor (= $300
7.6 workers
unit x $40 per
Cost of increasing =
daily production rate
(hiring and training) $37,696 1,488 units
per
day x 124 days)
of decreasing daily production rate (= $600
Subcontracting
Cost 1,488per unitx $10 per
units
(layoffs) 14,880 unit)

Table 13.3
Total cost
$52,576
Possible Strategy 3
Hiring and firing

Production Demand Per Day

Month Expected Demand Days (computed)
Jan 900 22 41
Feb 700 18 39
Mar 800 21 38
Apr 1,200 21 57
May 1,500 22 68
June 1,100 20 55
6,200 124

Production = Expected Demand

 Possible Strategy 3
Forecast demand and

Production rate per working day

monthly production
70 –

60 –

50 –

40 –

30 –

0 –
Jan Feb Mar Apr May June = Month
     
22 18 21 21 22 20 = Number of
working days
Possible Strategy 3

Cost Information
Inventory carrying cost $ 5 per unit per month
Subcontracting cost per unit $10 per unit
Average pay rate $ 5 per hour ($40 per day)
$ 7 per hour
Overtime pay rate (above 8 hours per day)
Labor-hours to produce a unit 1.6 hours per unit
Cost of increasing daily production rate (hiring $300 per unit
and training)
Cost of decreasing daily production rate $600 per unit
(layoffs)
Possible Strategy 3
Basic
Production Extra Cost of Extra Cost of
Daily Cost (demand Increasing Decreasing
Forecast Prod x 1.6 hrs/unit Production Production
Month (units) Rate x $5/hr) (hiring cost) (layoff cost) Total Cost

Jan 900 41 $ 7,200 — — $

7,200
$1,200
Feb 700 39 5,600 — (= 2 x $600) 6,800

Mar 800 38 6,400 — $600 7,000

(= 1 x $600)

Apr 57 9,600 $5,700 —

1,200 (= 19 x $300) 15,300
$3,300
May 1,500 68 12,000 (= 11 x $300) — 15,300

June 55 8,800 — $7,800

1,100 (= 13 x $600) 16,600
$49,600 $9,000 $9,600 $68,200
Comparison of Three Strategies
Cost Plan 1 Plan 2 Plan 3
Inventory carrying $ 9,250 $ 0 $ 0
Regular labor 49,600 37,696 49,600
Overtime labor 0 0 0
Hiring 0 0 9,000
Layoffs 0 0 9,600
Subcontracting 0 14,880 0
Total cost $58,850 $52,576 $68,200

Plan 2 is the lowest cost option

 Pure Strategies
QUARTER SALES FORECAST (LB)
Spring 80,000
Summer 50,000
Fall 120,000
Winter 150,000

Hiring cost = $100 per worker

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

SALES PRODUCTION
QUARTER FORECAST PLAN INVENTORY
Spring 80,000
Summer 50,000
Fall 120,000
Winter 150,000

Cost of Level Production Strategy

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

SALES PRODUCTION
QUARTER FORECAST PLAN INVENTORY
Spring 80,000 100,000 20,000
Summer 50,000 100,000 70,000
Fall 120,000 100,000 50,000
Winter 150,000 100,000 0
400,000 140,000
Cost of Level Production Strategy
(400,000 X $2.00) + (140,00 X $.50) = $870,000
Chase Demand Strategy

SALES PRODUCTION WORKERS WORKERS WORKERS

QUARTER FORECAST PLAN NEEDED HIRED FIRED
Spring 80,000
Summer 50,000
Fall 120,000
Winter 150,000

Cost of Chase Demand Strategy

Chase Demand Strategy
SALES PRODUCTION WORKERS WORKERS WORKERS
QUARTER FORECAST PLAN NEEDED HIRED FIRED
Spring 80,000 80,000 80 0 20
Summer 50,000 50,000 50 0 30
Fall 120,000 120,000 120 70 0
Winter 150,000 150,000 150 30 0
100 50

Cost of Chase Demand Strategy

(400,000 X $2.00) + (100 x $100) + (50 x $500) = $835,000
Example
A manufacturer of electric switchgears needs to prepare the aggregate production plan for the next year.
Let’s assume that a good measure of capacity is the number of working hours available per month. The
expected monthly demand & number of working days available per month are provided in the Table. With
the help of information provided below, prepare the aggregate plan using level production (constant
workforce, constant workhours).
◦ The manufacturer currently works for a single shift & employs 125 workers
◦ One unit of switchgear required 100 hours of production time.
◦ It is expected that at the beginning of the planning horizon, there will be a finished-goods inventory of
200 switchgears.
◦ The inventory carrying costs are Rs 1000 per switchgear per month & shortage cost is 200% of unit
carrying cost.
 No. of working
Month Demand days
April 250 23
May 220 22
June 300 21
July 290 24
August 260 22
September 180 22
October 200 19
November 220 23
December 250 21
January 200 23
February 240 20
March 270 24
 Chase strategy
Assuming that switchgear manufacturer chooses to devise a chase production strategy. Following
is the information available
◦ There is no beginning inventory.
◦ Overtime Costs are Rs 40 per hour and undertime costs are Rs 20 per hour
◦ Hiring & firing with the cost of hiring as Rs 5000 per worker and cost of firing is Rs 7500 per
worker.
Evaluate the following options for chase strategy and offer your suggestions to the switchgear
manufacturer.
(a) Utilizing overtime & undertime alternatives
(b) Using hiring and firing for capacity adjustment
 Mixed Strategy

◦ Combination of Level Production and Chase Demand strategies

◦ Example policies
◦ no more than x% of workforce can be laid off in one quarter
◦ inventory levels cannot exceed x dollars
◦ Some industries may 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)
+ $2 (P1 + P2 + P3 + P4)
Subject to
P1 - I1 = 80,000 (1)
Demand I1 + P2 - I2 = 50,000 (2)
constraints I2 + P3 - I3 = 120,000 (3)
I3 + P4 - I4 = 150,000 (4)
Production 1000 W1 = P1 (5)
constraints 1000 W2 = P2 (6)
1000 W3 = P3 (7)
1000 W4 = P4 (8)
100 + H1 - F1 = W1 (9)
Work force W1 + H2 - F2 = W2 (10)
constraints W2 + H3 - F3 = W3 (11)
W3 + H4 - F4 = W4 (12)
All-leather handmade products
◦ All leather company produces a line of handmade products: Belts, handbags & attache’ cases. Predicted demand for these
three types of items over six month planning horizon is given below:

Month Working days Belts Handbags Attaché cases

1 22 2500 1250 240
2 20 2800 680 380
3 19 2000 1625 110
4 24 3400 745 75
5 21 3000 835 126
6 17 1600 375 45
No. of labour hours required 2 3 6
◦ All workers have skill to work on any item. All-Leather has 46 employees who each has a share in
the firm and cannot be fired. There are an additional 30 locals that can be hired at short periods at
higher cost. Regular employees earn $8.50 per hour in regular time & $14 per hour on overtime.
Regular time comprises a seven-hour workday, and regular employees can work for additional 4
hours of overtime each day. The additional workers can be hired for $11 per hour and are kept on
payroll for at least one month. Cost of hiring and firing are negligible. Because of competitive nature
of the industry, all-leather does not want to incur any backorders nor it want to carry any inventory.
◦ What would be regular workforce level required to meet the aggregate units of demand. Will it be
beneficial for the company to bring the workforce to this level? Why or why not?
◦ What should be optimal plan for this planning problem?
Disaggregation

◦ Breaking an aggregate plan into more detailed plans

◦ Create Master Production Schedule for Material Requirements
Planning
 Collaborative Planning

◦ Sharing information and synchronizing production across supply

chain
◦ Part of CPFR (collaborative planning, forecasting, and replenishment)
◦ involves selecting products to be jointly managed, creating a single forecast of
customer demand, and synchronizing production across supply chain
Aggregate Planning for Services
◦ Most services cannot 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
◦ Labor is usually the most constraining resource for services