Operations Management

Topic 2
Aggregate planning

Economy & Business organization department

M. del Mar Viñas

Aggregate planning 1
 Index

• Aggregate planning
• Measures to adjust production capacity.
• Calculation of Aggregate planning
• Techniques of Aggregate planning
• M.P.S (Master Production Schedule)

Bibliography:
DOMÍNGUEZ MACHUCA/ ÁLVAREZ GIL/ GARCÍA GONZÁLEZ/RUÍZ JIMÉNEZ:
Dirección de Operaciones. Aspectos tácticos y operativos en la producción y los servicios. Mc. Graw-
Hill. Interamericana de España, S.A. Madrid, 1994.

These transparencies have been designed to support the classroom lectures of this subject.

Aggregate planning 2
 From Long term planning to Master Production Schedule.

Market reserach
Sales planning
O
B
J
E
T Financial planning Strategic planning
I
V
E
Other demand
S Production planning sources (warehouse,
Long Term plants,..)
Available resources

Facilities capacity Aggregate planning

Labour
Master Production
Schedule (M.P.S)

Planning and control of

Production
Order book from
customers 4
Aggregate planning
 Aggregate Planning of Production

 Considerations
 Units: family of products
 Time horizon: 6 - 18 months
 Time cubs: The time horizon is divided in months or
trimesters.

 Definition
Medium term production planning which is possible
from the capacity point of view.
It allows the Strategic Planning to be achieved
effectively taking into account the tactical objectives
of the production subsystem.

Aggregate planning 5
 Aggregate Planning: A simple example

 A company manufactures just one family of products. One standard

hour is required to produced 1 unit of this family.

 Each operator works an average of 100 hours per month. The

company has a staff of 100 workers.

 We assume that each month has the same number of working days.

 There are NOT pending orders. The initial inventory of the company
equals 500 units. This is exactly the security stock that the company
has determined to face possible deviations with respect to the sales
forecasts.

 No capacity problems have been reported concerning the machinery

& equipment.

Aggregate planning 6
 Alternative 1

120.000 units should be produced regularly along the

present year to satisfy the market demands.

SOLUTION
 Monthly production = 10.000 u / month
 Monthly production capacity:
100 workers x 100 h / month = 10.000 h / month
•
• 10.000 h/ month x 1 unit / h = 10.000 units / month
Consequently:
 Monthly needs = Available monthly capacity
 Sales are delivered on time.
 Inventories are constant and equal the security stock.
 NO delay costs due to shipment delays
Over-storage costs
Hiring and/or dismissal costs.

Aggregate planning 7
 Alternative 2 – Seasonal behaviour

 Imagine a production of 120.000 units per year and a constant

monthly production equal to 10.000 units (as alternative 1).
However the monthly needs are variable:

Months Jan Fe Ma Ap My Ju Jl Ag Se Oc No De

Needs
of production 15 15 10 5 5 5 10 5 5 10 15 20

(Alternative 2)

(Quantities in thousands o f units)

 If the monthly capacity is just 10.000 units, there will be

imbalance between market demand and the company supply in
some months.

Aggregate planning 8
 Alternative 2 – Seasonal behaviour (2)

Monthly needs of production

120
Thousands of units
100
80

60
40

20
0

De
No
Ma

Jl
My

Ju
Fe

Se

Oc
Ap

Ag
Ja

Months

 From January to May:  From May to

 Needs > Production December:
 Delays in deliveries  Production > Demand needs
 Low service level to customers  Possession cost

Aggregate planning 9
 Aggregate Planning calculation. Possibilities

 To influence the market demand

 To increase the market demand when it is lower than the capacity
and the other way around.
 Marketing actions (promotions, discounts, price decrease,
introduction of complementary products in demand terms, delayed
service,…)
 Active or aggressive actions.

 To adapt the production capacity

 Capacity increase/ decrease to adapt to market demands: overtime
hours, subcontracting,…
 Storage of production when we manufacture over the market
demands (excess of capacity)
 Reactive or passive actions.

Aggregate planning 10
 Temporary steps to adjust the capacity

Option Advantages Inconvenients Costs

• Avoids idle timing, • Legal limitations Hiring
inventory increase and • Industrial/labour disputes • Advertisements
overtime hours. • Unfeasible if labour is • Recruitment tests
highly specialised • Administrative work
Hiring/ • High training capacity • Labour training
dismissal of • Productivity decrease • Productivity decrease
labour Dismissal
• Labour economic
compensations
• Administrative work
• Labour conflicts
• Avoid hiring and • Legal limitations. • Extra cost of production
dismissals. Collective agreements • Costs for lower
Overtime • Avoid inventory increase • Optional. productivity
hours and service delays. • Influence over •…
motivation, quality,
productivity, accidents,…

Aggregate planning 11
 Temporary steps to adjust the capacity (2)

Option Advantages Inconvenients Costs

• Cheaper than dismissals • Salaries are paid to •Salaries

if the capacity deviation is labour • Fixed costs assumed
low • Low efficiency of even if machinery is not
• Avoids conflicts due to machinery used 100%.
Idle/spare dismissals.
timing
• Qualified and trained
workers are kept.
• Avoids inventory
increase.
• No additional • Risk to loose customers. • Cost of subcontracting
investments • Lack of availability by company.
• Avoids machinery subcontracting companies • Risk of penalization by
Subcontracting overwork • Lower control over customers.
• No legal limitations production process.
• No subsequent • Higher production costs.
dismissals.
• Reduction of labour • Legal and collective • None
Programming of without other risks. agreements limitations.
labour vacation

Aggregate planning 12
 Techniques to calculate the aggregate planning

 Pure techniques influence just one variable.

 Mixed techniques influence a combination of variables

 Chase demand plan: Adjusts capacity to reflect the fluctuations

in demand.
workforce variations, overtime hours, subcontracting,…
 Level capacity plan:
• Constant size of workforce:
part-time staff, delivery delays, overtime hours, ...
• Constant production per period:
Inventories, subcontracting or delivery delays,…

Aggregate planning 13
 Factors to be considered

• Environmental limitations
• Company policies
• Costs
• Customer satisfaction
• Basic cost of production is the same in all plans.
• Comparison of incremental cost of each plan.

Aggregate planning 14
 Aggregate planning process

Calculation of Temporary Alternative Best

production adjustments aggregate present
quantities of capacity plans alternative

NO

Desired Plans Appropriate aggregate

objectives evaluation planning?

YES

Definitive
aggregate
planning

Aggregate planning 15
 Aggregate planning. Techniques

 Intuitive or trial/error

 Analytical:
Mathematical programming  optimal solutions
Heuristic methods  satisfactory solutions

 Simulation: Usually computer simulation. Multiple solutions

are considered which are refined by certain research rules.

Aggregate planning 16
 Example of Aggregate plan

• A company manufactures just one family of products.

• One unit requires 1,5 standard labour hours. Each operator

develops an average of 8h per day.

• At present, December 2012, the company staff is 150

workers (50 fixed, 100 eventual).

• The present stock is 0 units even though a security stock of

500 units is required.

Aggregate planning 17
 Example of Aggregate planning

We’ll use a table to calculate the monthly production needs:

Jan Feb Mar Apr May Jun Jul Ago Sep Oct Nov Dec Total
Forecast 9.000 15.000 10.000 5.000 5.000 5.000 10.000 5.000 5.000 10.000 15.000 20.000 114.000
Compromised
10.000 1.800
orders
Pending
4.500
orders
Security
500
Stock
Production needs
plan
Cummulative
plan
Productive days 20 20 22 20 22 21 20 22 22 20 21 20 250

Aggregate planning 18
 Example of Aggregate planning

Calculation of monthly production needs:

Jan Feb Mar Apr May Jun Jul Ago Sep Oct Nov Dec Total
Forecast 9.000 15.000 10.000 5.000 5.000 5.000 10.000 5.000 5.000 10.000 15.000 20.000 114.000
Compromised
10.000 1.800
orders
Pending
4.500
orders
Security
500
Stock
Production needs
15.000 15.000 10.000 5.000 5.000 5.000 10.000 5.000 5.000 10.000 15.000 20.000 120.000
plan
Cummulative
15.000 30.000 40.000 45.000 50.000 55.000 65.000 70.000 75.000 85.000 100.000 120.000
plan
Productive days 20 20 22 20 22 21 20 22 22 20 21 20 250

Aggregate planning 19
 Example of aggregate plan

Company costs are the following:

 Materials per family unit: 5.000 m.u.

 Standard labour hour cost: 1.000 m.u./h

 Standard overtime hour cost: 1.500 m.u/h

 Idle labour hour cost: 1.100 m.u./h

 Recruitment cost: 100.000 m.u./operator

 Cost of dismissal of temporary worker: 150.000 m.u.

 Subcontracting 1 unit of the family: 1.000 m.u, over the

regular cost of production in the company.
 Possession cost: 200 m.u/u. & month

 Delayed service cost: 1.500 m.u/u. & month

Aggregate planning 20
 Example of aggregate plan

Other factors to be considered to develop the agregate planning,

derived from the company policies:

 There are 3 shifts and it is possible that 50 operators work

simultaneously. This implies a maximum number of working
hours per day: 1.200 h/day (150 operators x 8 h/day&
operator).
 The maximum number of overtime hours is 10% of regular
working hours.
 No dismissal of fixed workers.
 All costs are considered lineal functions.
 The daily market demand, inside one month, is considered
uniform and continuous.

Aggregate planning 21
 Alternative agregate plans

• Alternative 1
 Chase demand plan
• Alternative 2
 Workforce levelling
• Alternative 3
 Improvement of first alternative

Aggregate planning 22
 Alternative 1

Jan Feb Mar Apr May Jun Jul Ago Sep Oct Nov Dec Totals
Production
15.000 15.000 10.000 5.000 5.000 5.000 10.000 5.000 5.000 10.000 15.000 20.000 120.000
needs
Productive days 20 20 22 20 22 21 20 22 22 20 21 20 250'
Regular
15.000 15.000 10.000 5.000 5.000 5.000 10.000 5.000 5.000 10.000 15.000 16.000 116.000
Production
Overtime hours
Production
Regular labour hours 22.500 22.500 15.000 7.500 7.500 7.500 15.000 7.500 7.500 15.000 22.500 24.000
Labour 141 141 86 47 / 50 43 / 50 45 / 50 94 43 / 50 43 / 50 94 134 150
Regular labour cost 22.500 22.500 15.000 7.500 7.500 7.500 15.000 7.500 7.500 15.000 22.500 24.000 174.000
Labour fluctuations -9 -55 -36 +44 -44 +44 +40 +16
Recruitment /dismissal
1.350 8.250 5.400 4.400 6.600 4.400 4.000 1.600 36.000
costs
Overtime hours
Overtime hours cost
Subcontracting
costs
Inventory -4.000
Possessions/delay
6.000 6.000
cost
Idle time cost 550 1.430 990 1.430 1.430 5.830
Total cost 221.830

(Costs in thousands of m.u.)

Aggregate planning 23
 Possession costs and delay costs calculations

 If inventory is negative quantity  Delay cost

Multiply the absolute value of inventory and the unitary delay
cost.

 If inventory is a positive quantity  Possession

cost
 Multiply the unitary cost and the average inventory, which is the
initial inventory + final inventory divided by 2.

( II - IF ) ( II - IF ) ( II + IF )
IF * C + * C = C ( I F + ) = C
2 2 2

Aggregate planning 24
 Aggregate planning – Alternative 2

Jan Feb Mar Apr May Jun Jul Ago Sep Oct Nov Dec Totals
Production
15.000 15.000 10.000 5.000 5.000 5.000 10.000 5.000 5.000 10.000 15.000 20.000 120.000
needs
Productive days 20 20 22 20 22 21 20 22 22 20 21 20 250'
Regular
9.600 9.600 10.560 9.600 10.560 10.080 9.600 10.560 10.560 9.600 10.080 9.600 120.000
Production
Overtime hours
Production
Regular labour hours 14.400 14.400 15.840 14.400 15.840 15.120 14.400 15.840 15.840 14.400 15.120 14.400
Labour 90 90 90 90 90 90 90 90 90 90 90 90
Regular labour cost 14.400 14.400 15.840 14.400 15.840 15.120 14.400 15.840 15.840 14.400 15.120 14.400 180.000
Labour fluctuations -60
Recruitment /dismissal
9.000 9.000
costs
Overtime hours
Overtime hours cost
Subcontracting
costs
Inventory -5.400 -10.800 -10.240 -5.640 -80 5.000 4.600 10.160 15.720 15.320 10.400 0
Possessions/delay
8.100 16.200 15.360 8.460 120 492 960 1.476 2.588 3.104 2.572 1.040 60.472
cost
Idle time cost
Total cost 249.472
(Cost in thousands)
Aggregate planning 25
 Plan Agregado – Alternativa 3

Jan Feb Mar Apr May Jun Jul Ago Sep Oct Nov Dec Totals
Production
15.000 15.000 10.000 5.000 5.000 5.000 10.000 5.000 5.000 10.000 15.000 20.000 120.000
needs
Productive days 20 20 22 20 22 21 20 22 22 20 21 20 250'
Regular
15.040 15.040 10.090 5.546 6.101 5.824 5.546 6.101 6.101 10.026 14.448 13.760
Production
Overtime hours
554 1.376
Production
Subcontracting 1.259 3.188
Regular working hours 22.560 22.560 15.136 8.320 9.152 8.736 8.320 9.152 9.152 15.040 21.672 20.640
Labour 141 141 86 52 52 52 52 52 52 94 129 129
Cost of labour 22.560 22.560 15.136 8.320 9.152 8.736 8.320 9.152 9.152 15.040 21.672 20.640 170.440
Labour variations -9 -55 -34 +42 +35
Hiring & dismissal
1.350 8.250 5.100 4.200 3.500 22.400
costs
Overtime hours 832 2.064
Overtime hours cost 1.248 3.096 4.344
Subcontracting
3.147,5 7.970 11.117,5
cost
Final inventory 40 80 170 716 1.817 2.641 0 1.101 2.202 2.228 1.676 0
Possession & service
4 12 25 88,6 253,3 445,8 264,1 110,1 330,3 443 390,4 167,6 2.534,2
delay cost
Idle time cost
Total cost 210.835,7

(Cost in thousands)
Aggregate planning 26
 Aggregate planning for services companies

• Customers take part on the production process, they’re

served and exit the process.
• In general, services are intangible and cannot be stored.
• Most services cannot postpone the demand.
• In general, services cannot be transported.
• Services subcontracting is critical.
• Normally labour has a more important role than machinery
and fixed assets.
• Market demand cannot be predicted accurately.

Aggregate planning 27
 Master Production Schedule (MPS)(PMP)

 Definition
 Detailed plan that determines the number of units of
final products that will be manufactured and the exact
periods of time of production.

 Basic functions
 Refining the aggregate planning in quantities and
timing.
 Calculation of the Approximate capacity plan to verify
the viability of the Master Plan and the Aggregate plan.

Aggregate planning 28
 Aggregate Sales
Planning forecast M.t.

Agregate planning Sales forecast

Product units Product units

Available Sales
inventory forecast c.p.

Orders in Compromised
production orders

Technical Other demand

aspects sources

Deaggregation

Master Production Plan

proposal

Available
capacity Approximate capacity plan

¿ Feasible?
no
yes
MPS approved

Materials planning

Aggregate planning 29
 MPS timing horizon

 Timing horizon
 From 1 week to 1 year. In MRP environments, a year
is the usual period of time considered. Otherwise, 3
to 6 months.
 The timing horizon is influenced by production
process and the environment.
 At least = higher accumulated Ts of the final
products.
 Timing cubs
 Usually, it’s a week. Shorter periods implies excessive
calculations and longer periods can produce
excessive deviations.

Aggregate planning 30