Chapter 5

Aggregate Production Planning

(APP) or Resource Planning

James Kaconco

0772 653191
 Chapter Objectives

• Demonstrate how APP links long-range strategic

planning and short-range scheduling.
• Present strategies for matching supply and
demand: adjusting supply (an operations function) or
adjusting demand (a marketing function).
• Introduce strategies for developing aggregate
plans and ways to identify their strengths and
weaknesses.
• Define marginal costs and total costs as they
pertain to aggregate planning
 Overview of Operational
Planning Activities
• Long-Range Planning
– Focuses on strategic issues
related to capacity: process
selection, and plant location.
• Intermediate-Range Planning
– Focuses on tactical issues
pertaining to aggregate
workforce, inventory costs
and material requirements for
the coming year.
• Short-Range Planning
– Addresses day-to-day issues
of scheduling workers on jobs
at assigned work stations.
Overview of Manufacturing
Planning Activities
 Aggregate Production Planning
(APP)
• APP is the output of SOP
• Aggregate Production Planning
• The process for determining the most cost effective way to
match supply and demand over the next 12–18 months.
• Aggregate plan has to be achieved with available capacity
(Resources)
• Aggregate operations deal with Product group or broad category
(Aggregation)
• Aggregation reduces uncertainty; Details carry a lot of uncertainty.
• For longer periods, Details are harder to determine
• With variability in demand, there is no need to bother with details
• Aggregate planning deals with:
• Aggregated product (product family or group of products)
• Aggregated Resource Capacity (material, labor, space, funds,
machinery): Capacity needed for all individual products
• Time buckets: consider demand and production for a given period all
together
Aggregate Production Planning
Inputs (External and Internal)
 Aggregate Production Planning
Output
• Master Production Scheduling (MPS)
• Short-term scheduling of specific end product requirements for
the next several quarters at minimum cost.

• Deals with Rough-Cut Capacity Planning

• Determining that (Critical Resources are available)
• Materials, Space, Machinery, Labor, Time
 Aggregate Production Planning
Objectives
1. Minimize Costs / Maximize Profits
2. Maximize Customer Service
3. Minimize Inventory Investment
4. Minimize Changes in Production Rates
5. Minimize Changes in Workforce Levels
6. Maximize Utilization of Plant and Equipment

Note: Operations Managers try to determine the best

way to meet demand by adjusting various capacity
options available
 APP - Matching Demand and Supply
It is not feasible to increase capacity, in the intermediate
time range. Only options available are demand and supply

Demand (proactive) Options Supply (Reactive) Options

• Pricing • Hire and Fire (layoff) workers
– Used to shift demand from peak to off-peak –
periods May have upper or lower limit
– Price elasticity is important – Unions/internal policies may prohibit layoffs
• Promotion – Skill levels
– Advertising and other forms of promotion – Associated costs (e.g., recruiting, training,
– Issue: response rate and response patterns. severance (loss of job)-pay, morale)
Less control over timing of demand (may • Overtime
worsen the problem by bringing demand at
the wrong time). – Overtime may result in lower productivity,
• Back orders (delaying order filling) poorer quality, more accidents, increased
– Orders are taken in one period and deliveries payroll costs
promised for a later period • Part-time workers
– Possible loss of sales, increased record – Usually for low-to-moderate job skills eg
keeping, lowered customer service level Independent-contractors
• Create New demand for the available • Inventories
capacity – Produce in one period and sell in another
– Offer different products/services during off- – Costs: holding and carrying cost, money tied
peak periods. up in inventory, insurance, obsolescence,
• Yield (Revenue) Management deterioration, spoilage, breakage etc.
– Maximizing revenue by using a variable • Subcontracting
pricing strategy. Prices are set relative to
capacity availability. – Less control over output. Quality problems.
– Higher costs
 APP Key Elements
• Production Rate (manufactured units per period)
• Eg: (units per day or units per week).
• Regular Production; Overtime; Subcontracting;
Production rate adjustment – up or down
• Production can be based on either net or gross demand
• Workforce Level
• Number of workers required to provide a specified
level of production.
• Hiring and or Firing cost / staff
• Software assumes initial required staff is available
 APP Key Elements (cont’d)
• Inventory on Hand
• The surplus of units that results when production
exceeds demand in a given period.
• Carrying cost / unit / period
• Inventory at beginning of planning horizon has zero carrying
costs
• Inventory at end of planning horizon has carrying costs
• Shortages (Stock out)
• The deficit in units that results when demand
exceeds the number of units produced in a given
period.
• Stock out cost / unit / period
• Can be backordered or lost sales
 APP Costs
• Full Costs – costs associated with a
particular aggregate plan to determine the
optimal alternative
• Includes labor costs, inventory costs, material
costs
• Used for developing budget (labor, material, etc).
• Marginal (Incremental) Costs
• Unique costs attributable to a particular aggregate
production plan that are above and beyond those
required to build the product by its most
economical means.
 Aggregate Planning Strategies
The process of determining the quantity and timing of cost effective
production over an intermediate time frame
1. Level Aggregate Plans
• Maintains a constant workforce (constant production); adjusts
capacity to accommodate average demand
• Often used for make-to-stock products like appliances
• Disadvantage- builds inventory and/or uses back orders
• Options include: plan with / without end stock, plan with end stock
in all periods, plan with stock in some periods and stock out in other
periods, plan with stock out in all periods, plan with overtime and or
subcontracting

Demand
Units

Production

Time
 Aggregate Planning Strategies
2. Chase Aggregate Plans
• Produces exactly what is needed each period
• Adjusts labor / equipment capacity to satisfy period demands
• Disadvantages: affects morale of workers, skilled personnel
may be needed when not available, expensive to terminate
contracts or have staff paid when not working
• Advantage: minimal inventory costs

Demand
Production
Un
its

Time
 Aggregate Planning Strategies

3. Hybrid Aggregate Plans

• Uses a combination of level and chase options
• Options should be limited to facilitate execution
• May use a level workforce with overtime
• May allow inventory buildup and some
backordering
• May use short term sourcing
•Pure strategy: varying only one capacity variable in aggregate
planning.
 APP Example: Production Data
• The production data associated with an aggregate plan
for the company is as given below.
• Use the data to determine the various aggregate production
costs
Period (months) 1 2 3 4 5 6
Demand Forecast 400 2,200.0 1,500.0 1,100.0 900.0 1,100.0 1,600.0

Regular time Cost / Unit 100 USD

Carrying Cost / Unit/ Period 1.5 USD
Stockout cost / Unit/ Period 5 USD
Subcontracting Cost / Unit 125 USD
Hiring Cost / Worker 200 USD
Firing Cost / Worker 250 USD
Overtime Cost / Unit 48 USD
Worker Capacity 50 Units
Beginning Inventory 400 Units
Beginning Staff 30 people
 Level Production – General Approach
• Expected:
• stock built up and depletion in one or more periods
• Hiring / firing occurs at the beginning of the planning horizon
Period (months) 1 2 3 4 5 6
Demand Forecast 400 2,200.0 1,500.0 1,100.0 900.0 1,100.0 1,600.0
Level Production 1,333.3 1,333.3 1,333.3 1,333.3 1,333.3 1,333.3
Closing Stock (466.7) (633.3) (400.0) 33.3 266.7 -

Level Production Qty / Period 1,333.3

Staff Required 26.7
Staff Fired 3.3

Regular Time Costs 800,000.0

Labor Costs
Firing 833.3
Wages / Salary
Hiring
Overtime
Subcontracting
Inventory Costs
Carrying 450.0
Stockout 7,500.0
Aggregate Cost 808,783.3
 Level Production – Desired End
Inventory
• 200 Units are expected to remain in stock at end of
period 6
Period (months) 1 2 3 4 5 6
Demand Forecast 400 2,200.0 1,500.0 1,100.0 900.0 1,100.0 1,600.0
Level Production 1,366.7 1,366.7 1,366.7 1,366.7 1,366.7 1,366.7
Closing Stock (433.3) (566.7) (300.0) 166.7 433.3 200.0

Level Production Qty / Period 1,366.7

Staff Required 27.3
Staff Fired 2.7

Regular Time Costs 820,000.0

Labor Costs
Firing 666.7
Wages / Salary
Hiring
Overtime
Subcontracting
Inventory Costs
Carrying 1,200.0
Stockout 6,500.0
Aggregate Cost 828,366.7
 Level Production – With No Stock
out
• The closing balance of zero will occur in a period with
the highest average cumulative figure
Period (months) 1 2 3 4 5 6
Demand Forecast 400 2,200.0 1,500.0 1,100.0 900.0 1,100.0 1,600.0
Net Demand 1,800.0 1,500.0 1,100.0 900.0 1,100.0 1,600.0
Cumm Net Demand 1,800.0 3,300.0 4,400.0 5,300.0 6,400.0 8,000.0
Avg Cum Net Demand 1,800.0 1,650.0 1,466.7 1,325.0 1,280.0 1,333.3
Level Production 1,800.0 1,800.0 1,800.0 1,800.0 1,800.0 1,800.0
Closing Stock - 300.0 1,000.0 1,900.0 2,600.0 2,800.0

Level Production Qty / Period 1,800.0

Staff Required 36.0
Staff Fired
Staff Hired 6.0

Regular Time Costs 1,080,000.0

Labor Costs
Firing -
Wages / Salary
Hiring 1,200.0
Overtime
Subcontracting
Inventory Costs
Carrying 12,900.0
Stockout
Aggregate Cost 1,094,100.0
 Chase Demand
• Desired end stock should be considered when determining net demand for last
period
• Established procedure has to be followed
Period (Months) 1 2 3 4 5 6
Demand Forecast 400 2,200.0 1,500.0 1,100.0 900.0 1,100.0 1,600.0
Net Demand 1,800.0 1,500.0 1,100.0 900.0 1,100.0 1,600.0
Staff Required 36 30 22 18 22 32
Staff Hired 6 4 10
Staff Fired 6 8 4
Balance 0 0 0 0 0 0

Level Production Qty / Period 1,333.3

Staff Required 26.7
Staff Fired 3.3
Staff Hired
Level Production / Day 64

Labor Costs
RT 800,000.0
Firing 4,500.0
Hiring 4,000.0
Overtime (OT)
Subcontracting (SC)
Wages / Salaries

Inventory Costs
Carrying
Stockout

Aggregate Production Cost 808,500.0

 Mixed Strategy
• Combination of Level Production and Chase Demand
strategies;
• varying two or more capacity factors to determine a feasible
production plan
• Company policies examples
• no more than x% of workforce can be laid off in one quarter
• inventory levels cannot exceed x dollars
• Some industries may shut down manufacturing during the
low demand season and schedule employee vacations
during that time
 Aggregate Planning in Services
• The resulting plan in services is a time-phased projection
of service staff requirements
• Aggregate planning in manufacturing and services is
similar, but there are some key differences related to:
1. Most services cannot be inventoried
2. Demand for services is difficult to predict
3. Capacity is also difficult to predict
4. Service capacity must be provided at the appropriate place and
time
5. Labor is usually the most constraining resource for services
 Yield Management
• Yield (Revenue) Management
• The concept used in service operations with high-
fixed costs and low-variable costs that attempts to
match supply and demand (a chase strategy) to
maximize capacity utilization.
• Yield Management Requirements:
• The ability to segment the market
• Product perishability (cannot be inventoried)
• High-fixed and low-variable costs; where additional sales create more
profits
• Service or product can be sold in advance of consumption
• Demand fluctuates
• There is fixed capacity
• Lower-priced capacity that can be presold
Making Yield Management Work

1. Multiple pricing structures must be

feasible and appear logical to the
customer
2. Forecasts of the demand and duration of
demand are known
3. Customers are price sensitive
Hierarchical Nature of Capacity
Planning
Production Capacity Resource
Items Planning Planning Level

Sales and Resource

Product lines or
Operations (Capacity) Plants
families
Plan plan

Master Rough-cut Critical

Individual
production capacity work
products
schedule plan centers

Material Capacity All work

Components requirements requirements centers
plan plan

Shop Input/
Manufacturing Individual
floor output
operations machines
schedule control
 Resource Capacity Planning
• Resource capacity planning is used to determine
the total amount of capacity required (available)
to carry out a given – production plan
• This phase of resource capacity planning is handled at
top management level
• It is the process of determining the long term period
capacity needs of the business; 2 or more years
• It determines capacity needs for aggregated units
(product families, lines and or plants)
• The plans are usually stated in monetary terms
• Resource requirements plan is developed to verify
that an aggregate production plan is doable
• It has to consider (micro and macro factors)
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