1. Ardavan Asef-Vaziri Systems and Operations Management
Chapter 13
Aggregate Planning
Ardavan Asef-Vaziri Systems and Operations Management

2. Intermediate-range capacity planning
Aggregate Planning
Intermediate-range capacity planning
Usually covers a period of 12 months.
Short
range
Intermediate range
Long range
Now
2 months
1 Year

3. Overview of Planning Levels
Long-range plans
Long term capacity
Location / Layout
Intermediate plans (Aggregate Planning)
Manpower Utilization regular time, overtime
Outsourcing Buying from a third party
Inventory carrying product for latter periods
Backlog satisfying the demand of the earlier periods
Hiring and layoff
Short-range plans (Scheduling)
Job assignments
Machine loading

4. Aggregate Planning
Aggregate planning is a big picture approach to production planning.
It is a production plan to meet the demand throughout the year.
It is not concerned with individual products, but with a single aggregate product representing all products.
For example, in a TV manufacturing plant, the aggregate planning does not go into all models and sizes. It only deals with a single representative aggregate TV. Such an aggregate TV may even does not exist in reality.
All models are lumped together and represent a single product; hence the term aggregate planning.

5. Aggregate Planning
Aggregate approach permits planners to develop intermediate-range capacity planning without being involved in too much details.
In aggregate planning we are concerned with the quantity and also timing of demand. Demand is uneven through the year.
Two basic characteristics of aggregate planning
1-Aggregate Product
2-Uneven Demand
It begins with a forecast of aggregate demand for one year. Then a one year plan is prepared for each month. It includes volume of output, working hours, overtime, outsourcing, inventories, back orders, and hiring and layoffs.

6. Aggregate Planning 1-Demand 2-Regular time production
3-Overtime production
4-Outsourcing; buying from a third party
5-Inventory; production in one period and sale in one or more later periods.
6-Backlog; production in one period to satisfy the demand of one or more earlier periods.
7-Hiring and layoffs
A number of aggregate plans are examined in terms of feasibility and their costs. The best one is selected.

7. Aggregate Planning : Summary
The question is how to produce to meet the demand. How many
employees, how much overtime, outsourcing, inventories, back orders?
Basic aggregate planning strategies are:
Level Capacity
Chase Demand
Demand
Time period (year)

8. Level Capacity
Maintaining a steady rate of output while meeting variations in demand by a combination of options
Demand
Production
Production
Time period (one year)

9. Interesting Observation in Cumulative Graph
Cumulative output/demand
Cumulative
production
Cumulative
demand

10. Interesting Observation in Cumulative Graph
Give the following demand and production.
Using a line segment show the maximum inventory?
Cumulative output/demand
Cumulative
production
Cumulative
demand

11. Chase Demand
Matching capacity to demand; production in each period is equal to the expected demand for that period.
Demand
Time period (year)
and
Production

12. General Procedure for Aggregate Planning
Determine demand for each period.
Determine capacities (regular time, over time, subcontracting) for each period.
Identify company’s policies regarding inventories and work force. How much inventory is allowed? What rate of overtime and outsourcing is allowed?
Determine cost of working regular time and over time work, subcontracting, inventories, back orders.
Develop alternative plans, compare them and select.

13. Work Sheet

14. Back order (backlog)
Back order cost is the cost of satisfying the demand of one period in one or more periods later.
It is the cost of loss of goodwill, potential discounts, backtracking, extra paperwork for transactions, etc.
Back order cost is stated as cost / unit / period
(the same as inventory cost).
Total back order cost per period is
(cost / unit / period) × (total back order in the period).

15. Problem 1
Demand
Total
There are 20 full time employees, each can produce 10 units per period at the cost of $6 per unit. Therefore the supply of full time workers is as follows
Total
Overtime cost is $13 per unit.
Inventory carrying cost $5 per unit per period
Backlog cost $10 per unit per period
Maximum over time production is 20 units per period
Formulated the problem as a Linear Programming model. Using excel and solver find the optimal solution.

16. Solution to Problem 2

17. Changing Cells

18. RHS

19. LHS

20. LHS

21. Cost Table; Format

22. Production Cost; Regular, Overtime

23. Inventory Cost

24. Inventory Cost for All Periods

25. Backlog Cost

26. Backlog Cost for All Periods

27. Target Cell

28. Changing Cells

29. Constraints

30. Target Cell, Changing Cells, Constraints

31. Change to Min

32. Options

33. Solve

34. Objective Function Value

35. Problem 2

36. LP Formulation; Supply and Demand

37. LP Formulation; Cost Parameters

38. LP Formulation; Sumproduct and Constraints

39. LP Formulation; Optimal Solution

40. Disaggregation
Working with aggregate units facilitates intermediate planning.
But to put this plan into action we should translate it,
decompose it, disaggregate it and state it in terms of actual units
of products and for a shorter period
Aggregate planning was for 12 or more months.
Now we should break it down into shorter periods, say 2-3 months.
Disaggregation:
Breaking down the aggregate plan into specific products - from aggregate product to real specific products - based on the specific products, then calculating detail of manpower,
material and inventory requirements.

41. Disaggregation

42. Master Schedule The result of disaggregation is a master schedule.
The Master Schedule shows quantity and timing of specific products.
It usually covers 6 to 12 weeks.
After preparing a tentative Master Schedule, a planner can do Rough-cut Capacity Planning.
Rough-cut capacity planning is to check the feasibility of the Master Schedule with respect to available manpower and machinery capacities, storage spaces, and vendor capabilities.
It is just a rough check to ensure that the master schedule is achievable.
The master schedule then is used as the basis for short term planning.

43. Master Schedule
Aggregate plan: 12 months.
Master schedule: 12 weeks.
Master schedule is updated every 2 weeks.
Therefore, it is on a rolling basis, always we have a disaggregated plan for the next 12 weeks.

44. Master Production Schedule (MPS)
Master schedule states quantity and delivery time of specific products.
It says we need 75 push lawnmowers in January. But it does not say how we get it - from production, or from inventory.
Master Production Schedule (MPS) is developed
based on Master Schedule.
MPS: Quantity and timing of planned production.
MPS determines the
Promised Inventory, and the
Production Requirements available to promise inventory for each period.

45. Master Scheduling Process
Inputs
Outputs
Beginning inventory
Projected inventory
Master production schedule
Uncommitted inventory
(Available to Promise)
Master
scheduling
Forecast
Customer orders
The key idea is: we have a forecast, but it turns into and actual order when we receive a customer order.
MPS starts with a preliminary calculation of projected inventory.
This reveals when we need production to get additional inventory.

46. Example; Projected on-hand Inventory
Beginning Inventory
Forecast is larger than Customer orders in week 3
Customer orders are larger than forecast in week 1
Forecast is larger than Customer orders in week 2

47. Master Production Scheduling Process
Negative projected on-hand inventory is the signal for production.
Suppose the economic production lot size for this product is 70 units.
Whenever production is called, 70 units are produced.
The negative projected inventory of -29 in period 3 calls for production, 70 units are produced, the projected inventory becomes 41.
The same calculation continues across the whole planning horizon.

48. Example; Projected on-hand Inventory

49. Example; Projected on-hand Inventory

50. Available To Promise (ATP)
Now we can determine available to promise at each period.
We use a look ahead procedure.
Sum booked customer orders week by week up to (not including) the next week of production. This is booked orders.
The remaining inventory is ATP.
ATP is only calculated for the first week and for weeks in which there is a MPS quantity. (In this example: weeks 1, 3, 5, 7, 8)

51. Available To Promise (ATP); First week
Available to promise in week 1 = Inventory in week 0 + Production in week 1 - Customer Orders at week 1 - Customer Orders at week 2
ATP(1) = I(0)+ P(1) - CO(1) - CO(2)
ATP(1) = = 11
This is an uncommitted inventory.
It can be assigned to week 1, week 2, or both.

52. Available To Promise (ATP); Other weeks
For other weeks, beginning inventory is removed from the formula:
ATP(3) = P(3)-CO(3)-CO(4)
ATP(3)= = 56
For weeks 7 and 8, no CO, therefore ATP = MPS

53. Updating ATP
As additional orders are booked, they would be entered into the schedule.
ATP would be updated to reflect new booked orders.
Marketing can use updated ATP amounts to provide realistic delivery dates to customers

54. Updating MPS Frozen Firm Full Open 1 2 3 4 5 6 7 8 9 10 11 12
Changing to a master production schedule can be disruptive.
Particularly changes in the immediate periods of the schedule
Aggregate Plan is developed for say 1 year
Master Production Schedule is developed for a period of say 12 weeks.
MPS is updated say every 2 weeks, it is on a rolling basis.
Frozen Firm Full Open

55. Assignment Problem 1. Book Page 627.
Forecast of demand for the next four months is 70 units per month
Committed customer orders for the next four months are 80, 50, 30, and 10, respectively. Order size is 100 units. Beginning inventory is 0.
Prepare MPS
Prepare ATP

56. Solution to Problem 1

57. Solution to Problem 1

58. Solution to Problem 1

59. Solution to Problem 1