Aggregate Planning

Aggregate Planning: Objective

The objective of aggregate planning is usually to meet forecast demand while minimizing cost over
the planning period

QUARTER 1
Jan. Feb. March
150,000 120,000 110,000

QUARTER 2
April May June
100,000 130,000 150,000

QUARTER 3
July Aug. Sept.
180,000 150,000 140,000
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?
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

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
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

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

5. Using part-time workers

Useful for filling unskilled or low-skilled positions, especially in services

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

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

3. Counter seasonal product and service mixing

• Develop a product mix of counter seasonal items

• May lead to products or services outside the companyʼs areas of expertise
Options for Developing an Aggregate Plan
Methods for Aggregate Planning

• Graphical/ Tabular method

• Transportation Method
• Aggregate Planning in Services
Method 1 :Graphical Method

1. Determine the demand for each period

2. Determine the capacity for regular time, overtime, and
subcontracting each period
3. Find labor costs, hiring and layoff costs, and inventory holding costs
4. Consider company policy on workers and stock levels
5. Develop alternative plans and examine their total cost
Numerical Example
TABLE 1 Monthly Forecasts
EXPECTED PRODUCTION DEMAND PER DAY
MONTH 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

Average Total expected demand

requirement = Number of production days

6,200
= = 50 units per day
124
Numerical Example
Forecast demand
Production rate per working day
70 –
Level production using average
monthly forecast demand
60 –

50 –

40 –

30 –

0 –
Jan Feb Mar Apr May June = Month
ê ê ê ê ê ê
22 18 21 21 22 20 = Number of
working days
Numerical Example Plan 1 – constant workforce

TABLE 2 Cost Information

Inventory carrying cost $ 5 per unit per month
Subcontracting cost per unit $20 per unit
Average pay rate $10 per hour ($80 per day)
$17 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 and $300 per unit
training)
$600 per unit
Cost of decreasing daily production rate (layoffs)
Numerical Example
MONTHLY
PRODUCTION PRODUCTION AT DEMAND INVENTORY ENDING
MONTH DAYS 50 UNITS PER DAY FORECAST CHANGE INVENTORY
Jan 22 1,100 900 +200 200
Feb 18 900 700 +200 400
Mar 21 1,050 800 +250 650
Apr 21 1,050 1,200 –150 500
May 22 1,100 1,500 –400 100
June 20 1,000 1,100 –100 0
1,850

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
Numerical Example
COST CALCULATIONS
Inventory carrying $ 9,250 (= 1,850 units carried x $5
per unit)
Regular-time labor 99,200 (= 10 workers x $80 per day
x 124 days)
Other costs (overtime,
hiring, layoffs,
subcontracting) 0
Total cost $108,450

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
Numerical Example : Plan 2- Subcontract
In-house production = 38 units per day
x 124 days
= 4,712 units
Subcontract units = 6,200 – 4,712
= 1,488 units

COST CALCULATIONS
Regular-time labor $ 75,392 (= 7.6 workers x $80 per day x 124 days)

Subcontracting 29,760 (= 1,488 units x $20 per unit)

Total cost $105,152
Numerical Example : Plan 2- Subcontract
Forecast demand

Production rate per working day 70 –

Level production
60 – using lowest
monthly forecast
50 – demand

40 –

30 –

0 –
Jan Feb Mar Apr May June = Month
ê ê ê ê ê ê
22 18 21 21 22 20 = Number of
working days
Numerical Example : Plan 3- Chase
TABLE 3 Cost Computations for Plan 3

BASIC
EXTRA COST OF EXTRA COST OF
DAILY PRODUCTION
FORECAST INCREASING DECREASING
MONTH PROD COST (DEMAND X TOTAL COST
(UNITS) PRODUCTION (HIRING PRODUCTION
RATE 1.6 HRS/UNIT X
COST) (LAYOFF COST)
$10/HR)

Jan 900 41 $ 14,400 — — $ 14,400

$1,200
Feb 700 39 11,200 — 12,400
(= 2 x $600)

$600
Mar 800 38 12,800 — 13,400
(= 1 x $600)

$5,700
Apr 1,200 57 19,200 — 24,900
(= 19 x $300)

$3,300
May 1,500 68 24,000 — 24,300
(= 11 x $300)

$7,800
June 1,100 55 17,600 — 25,400
(= 13 x $600)

$99,200 $9,000 $9,600 $117,800

Numerical Example : Plan 3- Chase
Forecast demand

Production rate per working day

and monthly
production
70 –

60 –

50 –

40 –

30 –

0 –
Jan Feb Mar Apr May June = Month
ê ê ê ê ê ê
22 18 21 21 22 20 = Number of
working days
Comparison

TABLE 4 Comparison of the Three Plans

COST PLAN 1 PLAN 2 PLAN 3
Inventory carrying $ 9,250 $ 0 $ 0
Regular labor 99,200 75,392 99,200
Overtime labor 0 0 0
Hiring 0 0 9,000
Layoffs 0 0 9,600
Subcontracting 0 29,760 0
Total cost $108,450 $105,152 $117,800
Materials Requirement
Planning

MRP I
Master Production Schedule (MPS)

• MPS is established in terms of specific products, it disaggregates

the aggregate plan
• The schedule must be followed for a reasonable length of time
• The MPS is quite often fixed or frozen in the near-term part of
the plan
• The MPS is a rolling schedule
• The MPS is a statement of what is to be produced, not a forecast
of demand
The Planning Process
CHAPTER 14 ! MATERIAL REQUIREMENTS PL ANNING (MRP) AND ERP 567

Production
Figure 14.1
Marketing Finance
Capacity Customer demand Cash flow The Planning Process
Inventory

Supply Chain Human Resources

Procurement Sales & Operations Planning Staff planning
Supplier performance Generates an aggregate plan

Master production
schedule

Change master
production
Material schedule?
requirements plan

Schedule and
execute plan

Master Production Schedule

Aggregate Production Plan

Months January February

Aggregate Plan 1,500 1,200
(Shows the total
quantity of amplifiers)
Weeks 1 2 3 4 5 6 7 8
Master Production Schedule
(Shows the specific type and
quantity of amplifier to be
produced)
240-watt amplifier 100 100 100 100
150-watt amplifier 500 500 450 450
75-watt amplifier 300 100
Bills of Material

List of components, ingredients, and materials needed to

make product
Provides product structure
Items above given level are called parents
Items below given level are called components or children
Bills of Material: Example
BOM Example
Level Product structure for “Machine/ Product” (A)
0 A

1 B(2) C(3)

2 E(2) E(2) F(2)

3 D(2) G(1) D(2)

Bills of Material: Example
For an order of 50 Products

Part B: 2 x number of As = (2)(50) = 100

Part C: 3 x number of As = (3)(50) = 150
Low-Level Coding :
Part D: 2 x number of Bs Item is coded at the lowest
+ 2 x number of Fs = (2)(100) + (2)(300) = 800 level at which it occurs BOMs
Part E: 2 x number of Bs are processed one level at a
+ 2 x number of Cs = (2)(100) + (2)(150) = 500 time
Part F: 2 x number of Cs = (2)(150) = 300
Part G: 1 x number of Fs = (1)(300) = 300
Lead Times for Components

The time required to purchase, TABLE 2

produce, or assemble an item Lead Times for product

For production – COMPONENT LEAD TIME

the sum of the move, setup, and A 1 week
assembly or run times B 2 weeks
C 1 week
D 1 week
For purchased items –
E 2 weeks
the time between the recognition of a
F 3 weeks
need
G 2 weeks
and when it's available for production
Time-Phased Product Structure
Must have D and E
completed here so
Start production of D production can
begin on B

1 week
2 weeks to
D produce
B
2 weeks
E
A
2 weeks 1 week
E
2 weeks 1 week
G C
3 weeks
F
1 week
D
| | | | | | | |

1 2 3 4 5 6 7 8
Time in weeks
MRP Structure

Data Files Output Reports

MRP by period
BOM Master report
production schedule
MRP by date
report

Lead times
(Item master file) Planned order
report

Inventory data
Purchase advice
Material
requirement
planning programs
(computer and
software) Exception reports
Purchasing data
Order early or late or
not needed
Order quantity too
small or too large
Determining Gross Requirements

• Starts with a production schedule for the end item – 50 units of

Item A in week 8
• Using the lead time for the item, determine the week in which the
order should be released – a 1-week lead time means the order for
50 units should be released in week 7
• This step is often called "lead time offset" or "time phasing"
Determining Gross Requirements

• From the BOM, every Item A requires 2 Item Bs – 100 Item Bs are
required in week 7 to satisfy the order release for Item A
• The lead time for Item B is 2 weeks – release an order for 100 units of Item
B in week 5
• The timing and quantity for component requirements are determined by
the order release of the parent(s)
• The process continues through the entire BOM one level at a time – often
called "explosion”
• By processing the BOM by level, items with multiple parents are only
processed once, saving time and resources and reducing confusion
• Low-level coding ensures that each item appears at only one level in the
BOM
Gross Requirements Plan
Gross Material Requirements Plan for 50 Products (As)
TABLE 3
with Order Release Dates Also Shown
WEEK
LEAD
1 2 3 4 5 6 7 8 TIME
A. Required date 50
Order release date 50 1 week
B. Required date 100
Order release date 100 2 weeks
C. Required date 150
Order release date 150 1 week
E. Required date 200 300
Order release date 200 300 2 weeks
F. Required date 300
Order release date 300 3 weeks
D. Required date 600 200
Order release date 600 200 1 week
G. Required date 300
Order release date 300 2 weeks
Net Requirement Plan

The logic of net requirements

Gross + Allocations
requirements

Total requirements

On hand + Scheduled Net

– = requirements
receipts

Available inventory
Net Requirement Plan
ITEM ON HAND ITEM ON HAND
A 10 E 10
B 15 F 5
C 20 G 0
D 10

2 × number of As = 80

3 × number of As = 120
Net Requirement Plan

2 × number of Bs = 130
2 × number of Cs = 200

2 × number of Cs = 200

2 × number of Bs = 130
2 × number of Fs = 390

1 × number of Fs = 195
Determining Net Requirements

• Starts with a production schedule for the end item – 50 units of

Item A in week 8
• Because there are 10 Item As on hand, only 40 are actually
required –
(net requirement) = (gross requirement – on-hand inventory)
• The planned order receipt for Item A in week 8 is 40 units
– 40 = 50 – 10
Determining Net Requirements

• Following the lead time offset procedure, the planned

order release for Item A is now 40 units in week 7
• The gross requirement for Item B is now 80 units in week
7
• There are 15 units of Item B on hand, so the net
requirement is 65 units in week 7
• A planned order receipt of 65 units in week 7 generates a
planned order release of 65 units in week 5
Determining Net Requirements

• The on-hand inventory record for Item B is updated to

reflect the use of the 15 items in inventory and shows no
on-hand inventory in week 8
• This is referred to as the Gross-to-Net calculation and is
the third basic function of the MRP process
Gross Requirements Schedule

A S

B C B C
Master schedule
Lead time = 4 for A Lead time = 6 for S for B
Master schedule for A Master schedule for S sold directly

Periods 5 6 7 8 9 10 11 8 9 10 11 12 13 1 2 3
40 50 15 40 20 30 10 10

Periods 1 2 3 4 5 6 7 8
Therefore, these are
40+10 15+30
Gross requirements: B 10 40 50 20 the gross
=50 =45 requirements for B
MRP Planning Sheet
Lot-Sizing Techniques
1. Lot-for-lot technique orders just what is required for production based on net
requirements
1. May not always be feasible
2. If setup costs are high, lot-for-lot can be expensive

2. Economic order quantity (EOQ)

1. EOQ expects a known constant demand and MRP systems often deal with
unknown and variable demand

3. Periodic order quantity (POQ) orders quantity needed for a predetermined

time period
Interval = EOQ / average demand per period
Order quantity set to cover the interval
Order quantity recalculated at the time of the order release
No extra inventory
Lot-Sizing Techniques

• Dynamic lot sizing techniques

• Balance lot size and setup costs
• Part period balancing (least total cost)
• Least unit cost
• Least period cost (Silver-Meal)
• Dynamic programming approach
• Wagner-Whitin
Lot-for-Lot Example

WEEK 1 2 3 4 5 6 7 8 9 10
Gross
35 30 40 0 10 40 30 0 30 55
requirements
Scheduled
receipts
Projected on
35 35 0 0 0 0 0 0 0 0 0
hand
Net
0 30 40 0 10 40 30 0 30 55
requirements
Planned order
30 40 10 40 30 30 55
receipts
Planned order
30 40 10 40 30 30 55
releases

Holding cost = $1/week; Setup cost = $100; Lead time = 1 week

Lot-for-Lot Example
WEEK 1 2 3 4 5 6 7 8 9 10
No on-hand inventory is carried
Gross through the system
35 30 40 0 10 40 30 0 30 55
requirements Total holding cost = $0
Scheduled There are seven setups for this
receipts item in this plan
Total ordering cost = 7 x $100 =
Projected on $700
35 35 0 0 0 0 0 0 0 0 0
hand
Net
0 30 40 0 10 40 30 0 30 55
requirements
Planned order
30 40 10 40 30 30 55
receipts
Planned order
30 40 10 40 30 30 55
releases

Holding cost = $1/week; Setup cost = $100; Lead time = 1 week

EOQ Lot Size Example
WEEK 1 2 3 4 5 6 7 8 9 10
Gross
35 30 40 0 10 40 30 0 30 55
requirements
Scheduled
receipts
Projected on
35 35 0 43 3 3 66 26 69 69 39
hand
Net
0 30 0 0 7 0 4 0 0 16
requirements
Planned order
73 73 73 73
receipts
Planned order
73 73 73 73
releases

Holding cost = $1/week; Setup cost = $100; Lead time = 1 week

Average weekly gross requirements = 27; EOQ = 73 units
EOQ Lot Size Example
WEEK 1 2 3 4 5 6 7 8 9 10
Gross Ten-week usage equals a gross
35 30 40 0 10 40 30 0 30 55
requirements requirement of 270 units;
Scheduled therefore, weekly usage = 27, and
receipts 52 weeks (annual usage) =1,404
Projected on units.
35 35 0 43 3 3 66 26 69 69 39 D = annual usage = 1,404
hand
Net
S = setup cost = $100
0 30 0 0 7 0 4 0 0 16 H = holding (carrying) cost, on an
requirements
annual basis per unit
Planned order
receipts
73 73 73 73 = $1 * 52 weeks = $52
Q* = 73 units
Planned order
73 73 73 73
releases

Holding cost = $1/week; Setup cost = $100; Lead time = 1 week

Average weekly gross requirements = 27; EOQ = 73 units
EOQ Lot Size Example

Annual demand D = 1,404

Holding cost = 375 units x $1 (including 57 units
on hand at end of week 10)
Ordering cost = 4 x $100 = $400
Total cost = $375 + $400 = $775

Holding cost = $1/week; Setup cost = $100; Lead time = 1 week

Average weekly gross requirements = 27; EOQ = 73 units
POQ Lot Size Example
WEEK 1 2 3 4 5 6 7 8 9 10

Gross
35 30 40 0 10 40 30 0 30 55
requirements

Scheduled
receipts

Projected on
35 35 0 40 0 0 70 30 0 0 55
hand

Net requirements 0 30 0 0 10 0 0 0 55 0

Planned order
70 80 0 85 0
receipts

Planned order
70 80 85
releases

EOQ = 73 units; Average weekly gross requirements = 27;

POQ interval = 73/27 ≅ 3 weeks
POQ Lot Size Example

Setups = 3 x $100 = $300

Holding cost = (40 + 70 + 30 + 55) units x $1 = $195
Total cost = $300 + $195 = $495

EOQ = 73 units; Average weekly gross requirements = 27;

POQ interval = 73/27 ≅ 3 weeks