1. Aggregate Planning

2. Learning Objectives
Explain what aggregate planning is and how it is useful.
Identify the variables decision makers have to work with in aggregate planning and some of the possible strategies they can use.
Describe some of the graphical and quantitative techniques planners use.
Prepare aggregate plans and compute their costs.

3. Planning Horizon
Aggregate planning: Intermediate-range capacity planning, usually covering 2 to 12 months.
Short
range
Intermediate range
Long range
Now
2 months
1 Year

4. Overview of Planning Levels
Short-range plans (Detailed plans)
Machine loading
Job assignments
Intermediate plans (General levels)
Employment
Output
Long-range plans
Long term capacity
Location / layout

5. Establishes schedules
Planning Sequence
Business Plan
Establishes operations
and capacity strategies
Aggregate plan
Establishes
operations capacity
Master schedule
Establishes schedules
for specific products
Corporate
strategies
and policies
Economic,
competitive,
and political
conditions
Aggregate
demand
forecasts

6. Aggregate Planning Begin with forecast of aggregate demand
Forecast intermediate range
General plan to meet demand by setting
Output levels
Employment
Finished goods inventory level
Production plan is the output of aggregate planning
Update plan periodically – rolling planning horizon always covers the next 12 – 18 months

7. Aggregate Planning Inputs
Resources
Workforce
Facilities
Demand forecast
Policies
Subcontracting
Overtime
Inventory levels
Back orders/Backlog
Costs
Inventory carrying
Back orders
Hiring/firing
Overtime
Inventory changes
Subcontracting

8. Aggregate Planning Outputs
Total cost of a plan
Projected levels of
Inventory
Output
Employment
Subcontracting
Backordering

9. Aggregate Planning Strategies
Proactive
Alter demand to match capacity
Reactive
Alter capacity to match demand
Mixed
Some of each

10. Demand Options
Pricing
Promotion
Back orders
New demand

11. Capacity Options Hire and layoff workers Overtime/slack time
Part-time workers
Inventories
Subcontracting

12. Aggregate Planning Strategies
Maintain a level of workforce
Maintain a steady output rate
Match demand period by period
Use a combination of decision variables

13. Basic Strategies Level capacity strategy: Chase demand strategy:
Maintaining a steady rate of regular-time output while meeting variations in demand by a combination of options.
Chase demand strategy:
Matching capacity to demand; the planned output for a period is set at the expected demand for that period.

14. Level Approach Advantages Disadvantages
Stable output rates and workforce
Disadvantages
Greater inventory costs
Increased overtime and idle time
Resource utilizations vary over time

15. Chase Approach Advantages Disadvantages Investment in inventory is low
Labor utilization in high
Disadvantages
The cost of adjusting output rates and/or workforce levels

16. Techniques for Aggregate Planning
Determine demand for each period
Determine capacities for each period
Identify policies that are pertinent
Determine units costs
Develop alternative plans and costs
Select the best plan that satisfies objectives. Otherwise return to step 5.

17. Number of production days
Planning Example 1
Month
Expected Demand
Production Days
Demand Per Day (computed)
Jan
900 22 41
Feb
700 18 39
Mar
800 21 38
Apr
1,200 57
May
1,500 68
June
1,100 20 55
6,200
124
Average requirement =
Total expected demand
Number of production days
= = 50 units per day
6,200
124

18. Level production using average monthly forecast demand
Planning Example 1
Forecast demand
70 –
60 –
50 –
40 –
30 –
0 –
Jan Feb Mar Apr May June = Month
     
= Number of
working days
Production rate per working day
Level production using average monthly forecast demand

19. Planning Example 1 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)
Overtime pay rate
$ 7 per hour (above 8 hours per day)
Labor-hours to produce a unit
1.6 hours per unit
Cost of increasing daily production rate (hiring and training)
$300 per unit
Cost of decreasing daily production rate (layoffs)
$600 per unit

20. Planning Example 1 Month Production at 50 Units per Day
Demand Forecast
Monthly Inventory Change
Ending Inventory
Jan
1,100
900
+200
200
Feb
700
400
Mar
1,050
800
+250
650
Apr
1,200
-150
500
May
1,500
-400
100
June
1,000
-100
1,850
Cost Information
Inventory carry cost
$ 5 per unit per month
Subcontracting cost per unit
$10 per unit
Average pay rate
$ 5 per hour ($40 per day)
Overtime pay rate
$ 7 per hour (above 8 hours per day)
Labor-hours to produce a unit
1.6 hours per unit
Cost of increasing daily production rate (hiring and training)
$300 per unit
Cost of decreasing daily production rate (layoffs)
$600 per unit
Total units of inventory carried over from one
month to the next = 1,850 units
Workforce required to produce 50 units per day = 10 workers
Table 13.3

21. Planning Example 1 Month Production at 50 Units per Day
Demand Forecast
Monthly Inventory Change
Ending Inventory
Jan
1,100
900
+200
200
Feb
700
400
Mar
1,050
800
+250
650
Apr
1,200
-150
500
May
1,500
-400
100
June
1,000
-100
1,850
Costs
Calculations
Inventory carrying
$9,250
(= 1,850 units carried x $5 per unit)
Regular-time labor
49,600
(= 10 workers x $40 per day x 124 days)
Other costs (overtime, hiring, layoffs, subcontracting)
Total cost
$58,850
Cost Information
Inventory carry cost
$ 5 per unit per month
Subcontracting cost per unit
$10 per unit
Average pay rate
$ 5 per hour ($40 per day)
Overtime pay rate
$ 7 per hour (above 8 hours per day)
Labor-hours to produce a unit
1.6 hours per unit
Cost of increasing daily production rate (hiring and training)
$300 per unit
Cost of decreasing daily production rate (layoffs)
$600 per unit
Total units of inventory carried over from one
month to the next = 1,850 units
Workforce required to produce 50 units per day = 10 workers
Table 13.3

22. Reduction of inventory
Planning Example 1
Cumulative demand units
7,000 –
6,000 –
5,000 –
4,000 –
3,000 –
2,000 –
1,000 – –
Jan Feb Mar Apr May June
Reduction of inventory
Cumulative level production using average monthly forecast requirements
Cumulative forecast requirements
Excess inventory

23. Demand Per Day (computed)
Planning Example 2
Month
Expected Demand
Production Days
Demand Per Day (computed)
Jan
900 22 41
Feb
700 18 39
Mar
800 21 38
Apr
1,200 57
May
1,500 68
June
1,100 20 55
6,200
124
Minimum requirement = 38 units per day

24. Level production using lowest monthly forecast demand
Planning Example 2
Forecast demand
70 –
60 –
50 –
40 –
30 –
0 –
Jan Feb Mar Apr May June = Month
     
= Number of
working days
Production rate per working day
Level production using lowest monthly forecast demand

25. Planning Example 2 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)
Overtime pay rate
$ 7 per hour (above 8 hours per day)
Labor-hours to produce a unit
1.6 hours per unit
Cost of increasing daily production rate (hiring and training)
$300 per unit
Cost of decreasing daily production rate (layoffs)
$600 per unit

26. Planning Example 2 In-house production = 38 units per day x 124 days
Cost Information
Inventory carry cost
$ 5 per unit per month
Subcontracting cost per unit
$10 per unit
Average pay rate
$ 5 per hour ($40 per day)
Overtime pay rate
$ 7 per hour (above 8 hours per day)
Labor-hours to produce a unit
1.6 hours per unit
Cost of increasing daily production rate (hiring and training)
$300 per unit
Cost of decreasing daily production rate (layoffs)
$600 per unit
In-house production = 38 units per day x 124 days
= 4,712 units
Subcontract units = 6, ,712
= 1,488 units

27. Planning Example 2 In-house production = 38 units per day x 124 days
Cost Information
Inventory carry cost
$ 5 per unit per month
Subcontracting cost per unit
$10 per unit
Average pay rate
$ 5 per hour ($40 per day)
Overtime pay rate
$ 7 per hour (above 8 hours per day)
Labor-hours to produce a unit
1.6 hours per unit
Cost of increasing daily production rate (hiring and training)
$300 per unit
Cost of decreasing daily production rate (layoffs)
$600 per unit
In-house production = 38 units per day x 124 days
= 4,712 units
Subcontract units = 6, ,712
= 1,488 units
Costs
Calculations
Regular-time labor
$37,696
(= 7.6 workers x $40 per day x 124 days)
Subcontracting
14,880
(= 1,488 units x $10 per unit)
Total cost
$52,576
Table 13.3

28. Demand Per Day (computed)
Planning Example 3
Month
Expected Demand
Production Days
Demand Per Day (computed)
Jan
900 22 41
Feb
700 18 39
Mar
800 21 38
Apr
1,200 57
May
1,500 68
June
1,100 20 55
6,200
124
Production = Expected Demand

29. Forecast demand and monthly production
Planning Example 3
70 –
60 –
50 –
40 –
30 –
0 –
Jan Feb Mar Apr May June = Month
     
= Number of
working days
Production rate per working day
Forecast demand and monthly production

30. Planning Example 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)
Overtime pay rate
$ 7 per hour (above 8 hours per day)
Labor-hours to produce a unit
1.6 hours per unit
Cost of increasing daily production rate (hiring and training)
$300 per unit
Cost of decreasing daily production rate (layoffs)
$600 per unit

31. Planning Example 3 Cost Information Inventory carrying cost
Month
Forecast (units)
Daily Prod Rate
Basic Production Cost (demand x 1.6 hrs/unit x $5/hr)
Extra Cost of Increasing Production (hiring cost)
Extra Cost of Decreasing Production (layoff cost)
Total Cost
Jan
900 41
$ 7,200 —
Feb
700 39
5,600
$1,200 (= 2 x $600)
6,800
Mar
800 38
6,400
$600 (= 1 x $600)
7,000
Apr
1,200 57
9,600
$5,700 (= 19 x $300)
15,300
May
1,500 68
12,000
$3,300 (= 11 x $300)
June
1,100 55
8,800
$7,800 (= 13 x $600)
16,600
$49,600
$9,000
$9,600
$68,200
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)
Overtime pay rate
$ 7 per hour (above 8 hours per day)
Labor-hours to produce a unit
1.6 hours per unit
Cost of increasing daily production rate (hiring and training)
$300 per unit
Cost of decreasing daily production rate (layoffs)
$600 per unit
Table 13.3

32. Comparison of Three Plans
Cost
Plan 1
Plan 2
Plan 3
Inventory carrying
$ 9,250 $
Regular labor
49,600
37,696
Overtime labor
Hiring
9,000
Layoffs
9,600
Subcontracting
Total cost
$58,850
$52,576
$68,200
Plan 2 is the lowest cost option

33. Cumulative Graph 1 2 3 4 5 6 7 8 9 10 Cumulative production demand
Cumulative output/demand

34. Average Inventory Average Beginning Inventory + Ending Inventory2 =

35. Aggregate Plan to Master Schedule
Aggregate Planning
Dis-aggregation
Master Schedule

36. Disaggregating the Aggregate Plan
Master schedule: The result of disaggregating an aggregate plan; shows quantity and timing of specific end items for a scheduled horizon.
Rough-cut capacity planning: Approximate balancing of capacity and demand to test the feasibility of a master schedule.

37. Master Scheduling Master schedule
Determines quantities needed to meet demand
Interfaces with
Marketing
Capacity planning
Production planning
Distribution planning

38. Master Scheduler Evaluates impact of new orders
Provides delivery dates for orders
Deals with problems
Production delays
Revising master schedule
Insufficient capacity

39. Master Scheduling Process
Beginning inventory
Forecast
Customer orders
Inputs
Outputs
Projected inventory
Master production schedule
Uncommitted inventory

40. Projected On-hand Inventory
Inventory from previous week
Current week’s requirements - =

41. Projected On-hand Inventory
Beginning Inventory
Customer orders are larger than forecast in week 1
Forecast is larger than Customer orders in week 2
Forecast is larger than Customer orders in week 3

42. “slushy” somewhat firm
Time Fences in MPS
Time Fences – points in time that separate phases of a master schedule planning
horizon.
Period
“frozen” (firm or fixed)
“slushy” somewhat firm
“liquid” (open) 1 2 3 4 5 6 7 8 9

43. Solved Problems: Problem 1