1. Supply Chain Management (SCM) Aggregate Planning
Dr. Husam Arman

2. Today’s Outline Introduction
Hierarchy of production planning decisions
Overview of the Aggregate Planning Problem
Planning relationship
Prototype example:
Chase strategy / Constant workforce plan / mix strategies / LP

3. Aggregate Planning: introduction
Macro and micro planning decisions
Macro: planning workforce, production levels
Micro: what job do we work on today
Aggregate planning addresses the problem of determining the workforce levels to meet certain production requirements (produce what, when and how much forecast demand)
Competing objectives
React quickly to changes: hire & fire workers (smoothing)
Stability (stable workforce) build up of inventory during low demand periods minimize inventory
Maximize profit, under capacity restrictions
Key concept: manage groups of items rather than single items – aggregate units of production

4. Hierarchy of production planning decisions
Forecast of aggregate demand for t period horizon
Aggregate Production Plan
Determination of aggregate production and workforce levels for t period planning horizon
Master Production Schedule
Production levels by item by time period
Materials Requirements Planning System
Detailed timetable for production and assembly of components and subassemblies

5. Aggregate units of production
Aggregate planning assumes the existence of aggregate units of production
‘Average unit’ (in case types of items are similar)
Aggregate units in terms of weights (tons of steel), volume, amount of work required sales ₤ volume …for different types of items
Families: Group of items that share a common manufacturing setup cost; i.e., they have similar production requirements.
Aggregate Unit: A fictitious item representing an entire product family.
Aggregate Unit Production Requirements: The amount of (labor) time required for the production of one aggregate unit.

6. Computing the Aggregate Unit Production Requirements - example
Aggregate unit labor time = (.32)(4.2)+(.21)(4.9)+(.17)(5.1)+(.14)(5.2)+
(.10)(5.4)+(.06)(5.8) = hrs

7. Overview of the aggregate planning problem
What do we need?
Demand (aggregate forecasts): assumption ‘known’
Aggregate units: considered ‘available’
Planning horizon (6-12 months)
Costs
Constraints (e.g. bottlenecks, max capacity etc)

8. Planning Relationships
Business
or annual
plan 3

9. Planning Relationships
Business
or annual
plan
Production
or staffing 4

10. Planning Relationships
MPS or
workforce
schedule
Business
or annual
plan
Production
or staffing 5

11. Planning Relationships
MPS or
workforce
schedule
Business
or annual
plan
Production
or staffing
This slide and the next add in the information flows. 6

12. Planning Relationships
MPS or
workforce
schedule
Business
or annual
plan
Production
or staffing 7

13. Managerial Inputs Supplier capabilities Storage capacity
Materials availability
Materials
Current machine capacities
Plans for future capacities
Workforce capacities
Current staffing level
Operations
New products
Product design changes
Machine standards
Engineering
Labor-market conditions
Training capacity
Human resources
Cost data
Financial condition
of firm
Accounting and finance
Aggregate
plan
Customer needs
Demand forecasts
Competition behavior
Distribution and marketing 15

14. Aggregate Planning Objectives
Minimize Costs/Maximize Profits
Maximize Customer Service
Minimize Inventory Investment
Minimize Changes in Production Rates
Minimize Changes in Workforce Levels
Maximize Utilization of Plant and Equipment
Following Figure 11.1 this list builds the typical objectives of a planning process. 25

15. Why Aggregate Planning Is Necessary
Fully load facilities & minimize overloading and underloading
Make sure enough capacity is available to satisfy expected demand
Plan for orderly & systematic change of production capacity to meet peaks & valleys of expected customer demand
Get most output for amount of resources available

16. Role of Aggregate Planning in a Supply Chain
Given the demand forecast for each period in the planning horizon, we can determine the production level, inventory level, and the capacity level for each period that maximizes the firm’s (supply chain’s) profit over the planning horizon
All supply chain stages should work together on an aggregate plan that will optimize supply chain performance

17. Inputs
A forecast of aggregate demand covering selected planning horizon (6-18 months)
Alternative means available to adjust short- to medium-term capacity, to what extent each alternative could impact capacity & related costs
Current status of system in terms of workforce level, inventory level & production rate

18. Outputs
Production plan: aggregate decisions for each period in planning horizon about
workforce level
inventory level
production rate
Projected costs if production plan was implemented

19. Pure Strategies for Informal Approach
Matching Demand (Chase Strategy)
Level Capacity
Buffering With Inventory
Buffering With Backlog
Buffering With Overtime or Subcontracting
Matching anticipated demand requires varying the size of the workforce. Does not insure actual demand is met.
Level capacity requires buffering.
Carrying additional inventory—Make to Stock
Allowing backlog to grow (Good for Make to Order)
Overtime, part-time, or contracting (Either MTS or MTO)

20. Matching Demand Strategy
Capacity (production) in each time period is varied to exactly match forecasted aggregate demand in that time period
Capacity is varied by changing workforce level
Finished-goods inventories are minimal
Labor & materials costs tend to be high due to frequent changes

21. Chase Demand
Demand
Units
Time
Production

22. Developing & Evaluating the Matching Production Plan
Production rate is dictated by forecasted aggregate demand
Convert forecasted aggregate demand into required workforce level using production time information
Primary costs of this strategy are costs of changing workforce levels from period to period, i.e.., hirings & layoffs

23. Level Capacity Strategy
Capacity (production rate) is held level (constant) over planning horizon
Difference between constant production rate & demand rate is made up (buffered) by inventory, backlog, overtime, part-time labor and/or subcontracting

24. Level Production
Demand
Units
Time
Production

25. Developing & Evaluating Level Production Plan
Assume that amount produced each period is constant, no hiring or layoffs
Gap between amount planned to be produced & forecasted demand is filled with either inventory or backorders, i.e., no overtime, no idle time, no subcontracting
Primary costs of this strategy are inventory carrying & backlogging costs

26. Aggregate Planning Strategies
Possible Alternatives Possible Alternatives
Strategy during Slack Season during Peak Season
Chase #1: vary workforce Layoffs Hiring level to match demand
Chase #2: vary output Layoffs, undertime, Hiring, overtime, rate to match demand vacations subcontracting
Level #1: constant No layoffs, building No hiring, depleting workforce level anticipation inventory, anticipation inventory, undertime, vacations overtime, subcontracting, backorders, stockouts
Level #2: constant Layoffs, building antici- Hiring, depleting antici- output rate pation inventory, pation inventory, over- undertime, vacations time, subcontracting, backorders, stockouts
This series of slides builds the table in the text that identifies four basic planning strategies.
This slide advances automatically. 16

27. Aggregate Planning Process
Determine requirements for planning horizon
Identify alternatives, constraints, and costs
Prepare prospective plan for
planning horizon
Move ahead
to next
planning session
Implement and update the plan
Is the plan acceptable? No
Yes
Figure 14.3 23

28. Aggregate Planning Costs
Regular-time Costs
Overtime Costs
Hiring and Layoff Costs
Inventory Holding Costs
Backorder and Stockout Costs
This slide builds the important points on the relevant costs in the planning process. 25

29. Pure Strategies QUARTER SALES FORECAST (LB) Spring 80,000
Example:
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

30. Level Production Strategy
= 100,000 pounds
(50, , , ,000) 4
Spring 80, ,000 20,000
Summer 50, ,000 70,000
Fall 120, ,000 50,000
Winter 150, ,000 0
400, ,000
Cost of Level Production Strategy
(400,000 X $2.00) + (140,00 X $.50) = $870,000
SALES PRODUCTION
QUARTER FORECAST PLAN INVENTORY

31. Chase Demand Strategy Cost of Chase Demand Strategy
SALES PRODUCTION WORKERS WORKERS WORKERS
QUARTER FORECAST PLAN NEEDED HIRED FIRED
Spring 80,000 80,
Summer 50,000 50,
Fall 120, ,
Winter 150, ,
100 50
Cost of Chase Demand Strategy
(400,000 X $2.00) + (100 x $100) + (50 x $500) = $835,000

32. Mixed Strategy
Combination of level production and chase demand strategies
Examples of management policies
no more than x% of the workforce can be laid off in one quarter
inventory levels cannot exceed x dollars
Many industries may simply shut down manufacturing during the low demand season and schedule employee vacations during that time

33. 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

34. Minimize Z = $100 (H1 + H2 + H3 + H4) + $500 (F1 + F2 + F3 + F4)
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 W1 = P1 (5)
constraints 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)

35. Other Quantitative Techniques
Linear decision rule (LDR)
Search decision rule (SDR)
Management coefficients model

36. Hierarchical Nature of Planning
Items
Product lines or families
Individual products
Components
Manufacturing operations
Resource Level
Plants
Individual machines
Critical work centers
Production Planning
Capacity Planning
Resource requirements plan
Rough-cut capacity plan
Capacity requirements plan
Input/ output control
Sales and Operations Plan
Master production schedule
Material requirements plan
Shop floor schedule
All work centers
Disaggregation: process of breaking an aggregate plan into more detailed plans