Aggregate Planning

Operations Management
Aggregate Planning
Aggregate Planning at Frito-Lay
Aggregate Planning at Frito-Lay
• More than three dozen brands, 15 brands sell more than $100
million annually, 7 sell over $1 billion
• Planning processes covers 3 to 18 months
• Unique processes and specially designed equipment
• High fixed costs require high volumes and high utilization
• Demand profile based on historical sales, forecasts, innovations,
promotion, local demand data
• Match total demand to capacity, expansion plans, and costs
• Quarterly aggregate plan goes to 36 plants in 17 regions
• Each plant develops 4-week plan for product lines and
production runs
3
Sales and Operations Planning
• Coordination of demand forecasts with functional areas

and the supply chain
• Typically done by cross-functional teams
• Determine which plans are feasible
• Limitations must be reflected
• Provides warning when resources do not match
expectations
• Output is an aggregate plan
• Aggregate plans use information regarding families or
product lines rather than individual products.
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• Decisions must be tied to strategic planning and integrated

with all areas of the firm over all planning horizons
• S&OP is aimed at
1. The coordination and integration of the internal and external
resources necessary for a successful aggregate plan
2. Communication of the plan to those charged with its execution
6
It requires:
• A logical unit for measuring sales and output
• A forecast of demand for a reasonable intermediate planning
period in aggregate terms
• A method to determine the relevant costs
• A model that combines forecasts and costs so scheduling
decisions can be made for the planning period
7
Aggregate Planning
Aggregate Planning
The objective of aggregate planning is usually to meet forecast

demand while minimizing cost over the planning period
However , other strategic issues may be more important than low

cost. These strategies may be to smooth employment, to drive down
inventory levels, or to meet a high level of service, regardless of
cost.
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Aggregate Planning
10
Aggregate Planning
• Combines appropriate resources into general terms

• Part of a larger production planning system
• Disaggregation breaks the plan down into greater detail
• Disaggregation results in a master production schedule
11
Aggregate Planning of Capacity
Aggregate Planning Strategies
1. Should inventories be used to absorb changes in demand?

2. Should changes be accommodated by varying the size of the
workforce?
3. Should part-timers be used, or should overtime or idle time
absorb fluctuations?
4. Should subcontractors be used and maintain a stable
workforce?
5. Should prices or other factors be changed to influence
demand?
13
Capacity Options
1. Changing inventory levels

▶Increase inventory in low demand periods to meet
high demand in the future
▶Increases costs associated with storage, insurance,
handling, obsolescence, pilferage, and capital
investment
▶Shortages may mean lost sales due to long lead
times and poor customer service
14
Capacity Options
2. Varying workforce size by hiring or layoffs

▶Match production rate to demand
▶Training and separation costs for hiring and laying
off workers
▶New workers may have lower productivity
▶Laying off workers may lower morale and
productivity
15
Capacity Options
3. Varying production rates through overtime or idle time

▶Allows constant workforce
▶May be difficult to meet large increases in demand
▶Overtime can be costly and may drive down
productivity
▶Absorbing idle time may be difficult
16
Capacity Options
3. Varying production rates through overtime or idle time

▶Allows constant workforce
▶May be difficult to meet large increases in demand
▶Overtime can be costly and may drive down
productivity
▶Absorbing idle time may be difficult
17
Capacity Options
4. Subcontracting
▶Temporary measure during periods of peak
demand
▶May be costly
▶Assuring quality and timely delivery may be difficult
▶Exposes your customers to a possible competitor
18
Capacity Options
5. Using part-time workers

▶Useful for filling unskilled or low skilled positions,
especially in services
19
Demand Options
1. Influencing demand
• Use advertising or promotion to increase demand in low periods
• Attempt to shift demand to slow periods
• May not be sufficient to balance demand and capacity
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Demand Options
2. Back ordering during high-demand periods

▶Requires customers to wait for an order without
loss of goodwill or the order
▶Most effective when there are few if any substitutes
for the product or service
▶Often results in lost sales
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Demand Options
3. Counter seasonal product and service mixing

▶Develop a product mix of counter seasonal items
▶May lead to products or services outside the
company’s areas of expertise
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Aggregate Planning Options: Advantages and Disadvantages
23
Mixing Options to Develop a Plan
• A mixed strategy may be the best way to achieve minimum

costs.
• There are many possible mixed strategies
• Finding the optimal plan is not always possible
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Chase Strategy
▶Chase strategy
▶Match output rates to demand forecast for each
period
▶Vary workforce levels or vary production rate
▶Will result in low inventory
▶Favored by many service organizations
25
Level strategy
▶Level strategy
▶Daily production is uniform
▶Use inventory or idle time as buffer
▶Stable production leads to better quality and
productivity
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Example
Densepack is to plan workforce and production levels for the six-

month period January to June. The firm produces a line of disk
drives for mainframe computers that are plug compatible with
several computers produced by major manufacturers. Forecast
demands over the next six months for a particular line of drives
produced in the Milpitas, California, plant are 1,280, 640, 900,
1,200, 2,000, and 1,400. There are currently (end of December)
300 workers employed in the Milpitas plant. Ending inventory in
December is expected to be 500 units, and the firm would like to
have 600 units on hand at the end of June.
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• There are several ways to incorporate the starting and the ending
inventory constraints into the formulation. The most convenient
is simply to modify the values of the predicted demand. Define
net predicted demand in period 1 as the predicted demand
minus initial inventory.
• If there is a minimum ending inventory constraint, then this
amount should be added to the demand in period T
• net predicted demand for January=780(1,280 - 500)
• net predicted demand for June= 2,000 (1,400 1 600)
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The net predicted demand and the net cumulative demand for the
six months January to June are as follows:
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We require a means of translating aggregate production in units to
workforce levels. Because not all months have an equal number of
working days, we will use a day as an indivisible unit of measure
and define
K = Number of aggregate units produced by one worker in one day.
The number of working days per month for January to June is 20,
24, 18, 26, 22, and 15 respectively
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In the past, the plant manager observed that over 22 working days,
with the workforce level constant at 76 workers, the firm produced
245 disk drives
That means that on average the production rate was
245/22=11.1364 drives per day when there were 76 workers
employed at the plant
It follows that one worker produced an average of 11.1364/76=
0.14653 in one day
K= 0.14653
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In order to illustrate the cost trade-offs of various production plans,
we will assume in the example that there are only three costs to be
considered: cost of hiring workers, cost of firing workers, and cost of
holding inventory.
𝑐𝐻 = Cost of hiring one worker = $500
𝑐𝐹 = Cost of firing one worker = $1,000
ℎ= Cost of holding one unit of inventory for one month = $80.
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Mixed Strategies and Additional Constraints
The zero inventory plan and the constant workforce strategies target
one objective.
Combining the two plans may result in lower Costs
The following Figure shows the constant workforce strategy
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Mixed Strategies and Additional Constraints
Suppose that we use two production rates
Need to produce 3,520/4=880 units in the each of the first 4

months
The may and June production is then set to 2000, exactly matching
the net demand in these months. 34
Solving Aggregate Planning Problems
Solving Aggregate Planning Problems (video)
• Aggregate Planning can be solved via linear programming

• Because of the efficiency of commercial linear programming
codes, this means that (essentially) optimal solutions can be
obtained for very large problems
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Input parameters for LP
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Decision variables
The following are the decision variables:
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Problem Constraints
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Objective Function
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Extensions
Linear programming also can be used to solve somewhat more

general versions of the aggregate planning problem. Uncertainty of
demand can be accounted for indirectly by assuming that there is a
minimum buffer inventory 𝐵𝑡 each period
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Extensions
Upper bounds on the number of workers hired and the number of

workers fired each period could be included in a similar way.
Capacity constraints on the amount of production each period could
easily be represented by the set of constraints:
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Extensions
The linear programming formulation introduced in this section

assumed that inventory levels would never go negative. However, in
some cases it might be desirable or even necessary to allow
demand to exceed supply, In order to treat backlogging of excess
demand, the inventory level 𝐼𝑡 must be expressed as the difference
between two nonnegative variables, 𝐼𝑡+ , 𝐼𝑡− ,
Where 𝐼𝑡+ represents excess inventory and 𝐼𝑡− represents shortage
43
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Operations Management

• Coordination of demand forecasts with functional areas

• Decisions must be tied to strategic planning and integrated

The objective of aggregate planning is usually to meet forecast

However , other strategic issues may be more important than low

• Combines appropriate resources into general terms

1. Should inventories be used to absorb changes in demand?

1. Changing inventory levels

2. Varying workforce size by hiring or layoffs

3. Varying production rates through overtime or idle time

3. Varying production rates through overtime or idle time

5. Using part-time workers

2. Back ordering during high-demand periods

3. Counter seasonal product and service mixing

• A mixed strategy may be the best way to achieve minimum

Densepack is to plan workforce and production levels for the six-

Suppose that we use two production rates

Need to produce 3,520/4=880 units in the each of the first 4

• Aggregate Planning can be solved via linear programming

The following are the decision variables:

Linear programming also can be used to solve somewhat more

Upper bounds on the number of workers hired and the number of

The linear programming formulation introduced in this section

Where 𝐼𝑡+ represents excess inventory and 𝐼𝑡− represents shortage

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