Aggregate Planning

Planning
 Setting goals & objectives
 Example: Meet demand within the limits
of available resources at the least cost
 Determining steps to achieve goals
 Example: Hire more workers
 Setting start & completion dates
 Example: Begin hiring in Jan.; finish, Mar.
 Assigning responsibility
Planning Tasks and Responsibilities
Aggregate Planning
 It is concerned with determining the
quantity and timings of production for
the intermediate future, often from 3 to
18 months.
 The main objective of aggregate
planning is to minimize cost over the
planning period
 Aggregate Planning Goals
 Meet demand
 Use capacity efficiently
 Meet inventory policy
 Minimize cost
 Labor
 Inventory
 Plant & equipment
 Subcontract
Relationships of the
Aggregate Plan

Marketplace Product Research and

and Demand Decisions Technology

Demand Process
Forecasts, Planning & Capacity
orders Decisions Work Force
Raw Materials
Available
Aggregate Inventory On
Plan for Hand
Production External
Capacity
Master Subcontractors
Production
Schedule, and MRP systems

Detailed Work
Schedules
Types of Production-Planning and Control Systems

Pond-Draining Systems

Push Systems

Pull Systems
 Pond-Draining
Systems

 Emphasis on holding inventories

(reservoirs) of materials to
support production
 Little information passes through
the system
 As the level of inventory is drawn
down, orders are placed with the
supplying operation to replenish
inventory
 May lead to excessive inventories
and is rather inflexible in its ability
to respond to customer needs
 Push Systems

 Use information about customers, suppliers, and production to

manage material flows
 Flows of materials are planned and controlled by a series of
production schedules that state when batches of each particular
item should come out of each stage of production
 Can result in great reductions of raw-materials inventories and in
greater worker and process utilization than pond-draining systems
 Pull Systems

 Look only at the next stage of production and determine what is

needed there, and produce only that
 Raw materials and parts are pulled from the back of the system
toward the front where they become finished goods
 Raw-material and in-process inventories approach zero
 Successful implementation requires much preparation
 Aggregate Planning Strategies
Pure Strategies

 Capacity Options — change capacity:

 changing inventory levels
 varying work force size by hiring or
layoffs
 varying production capacity through
overtime or idle time
 subcontracting
 using part-time workers
Aggregate Planning Strategies
Pure Strategies

 Demand Options — change

demand:
 influencing demand
 backordering during high demand
periods
 counterseasonal product mixing
Aggregate Scheduling Options -
Advantages and Disadv.
Option Advantage Disadvantage Some
Comments

Changing Changes in Inventory Applies mainly

inventory levels human resources holding costs; to production,
are gradual, not Shortages may not service,
abrupt result in lost operations
production sales
changes

Varying Avoids use of Hiring, layoff, Used where size

workforce size other alternatives and training of labor pool is
by hiring or costs large
layoffs
Advantages/Disadvantages
- Continued
Option Advantage Disadvantage Some
Comments
Varying Matches seasonal Overtime Allows
production rates fluctuations premiums, tired flexibility within
through overtime without workers, may not the aggregate
or idle time hiring/training meet demand plan
costs
Subcontracting Permits Loss of quality Applies mainly
flexibility and control; reduced in production
smoothing of the profits; loss of settings
firm's output future business
Advantages/Disadvantages
- Continued
Option Advantage Disadvantage Some
Comments
Using part-time Less costly and High Good for
workers more flexible turnover/training unskilled jobs in
than full-time costs; quality areas with large
workers suffers; temporary labor
scheduling pools
difficult
Influencing Tries to use Uncertainty in Creates
demand excess capacity. demand. Hard to marketing ideas.
Discounts draw match demand to Overbooking
new customers. supply exactly. used in some
businesses.
Advantage/Disadvantage -
Continued
Option Advantage Disadvantage Some
Comments
Back ordering May avoid Customer must Many companies
during high- overtime. Keeps be willing to backorder.
demand periods capacity constant wait, but
goodwill is lost.

Counterseasonal Fully utilizes May require Risky finding

products and resources; allows skills or products or
service mixing stable workforce. equipment services with
outside a firm's opposite demand
areas of patterns.
expertise.
The Extremes

Level Chase
Strategy Strategy

Production rate Production

is constant equals
demand
Aggregate Production Planning
Two generic strategies

 In level strategy, the emphasis is not to

disturb the existing production rate at all

 In chase strategy, no effort is made to

carry inventory from one period to another;
the supply – demand mismatch is addressed
during each period by employing a variety
of capacity related alternatives
 APP Strategy APP alternatives applicable Key features
Inventory based alternatives Inventory as the critical link between
the periods; Made-to-stock
Level Strategy (a) Build Inventory
environments; Products with low risks
(b) Backlog/Backorder/Shortage of obsolescence
Capacity adjustment alternatives
(a) Over Time/Under Time
No inventory carried from one period
(b) Vary no. of shifts
(c) Hire/Lay-off workers to another; Made-to-order and project
Chase Strategy
environments; Several service
Capacity augmentation alternatives
systems
(a) Sub-contract/Outsource
(b) De-bottleneck
Mixed Strategy (MS)
 It is a combination of the available alternatives
to devise a strategy for aggregate production
planning. Some ex-
 MS 1: Hire a certain no. of workers at the
beginning of the planning horizon, maintain a
constant production rate and utilize inventory
based alternatives to match supply with
demand.
 MS 2: Do not hire or lay off workers, adjust the
production rate by varying the no. of shifts, use
inventory and sub contracting.
 MS 3: Do not hire or lay off workers, use
subcontracting during high demand and build
inventory during low demand.
Example 1.1
 A manufacturer of electrical switchgears
is in the process of preparing the
aggregate production plan for the next
year.Let us assume that the good
measure of capacity is the number of
working hours available per month.The
table below gives details pertaining to
the forecast demand for the
“equivalent” model of the switchgears.
 Month Demand No. of working days
April 250 23
May 220 22
June 300 21
July 290 24
Aug 260 22
Sept 180 22
Oct 200 19
Nov 220 23
Dec 250 21
Jan 200 23
Feb 240 20
Mar 270 24
 The following relevant details are also available-
1. The manufacturer currently works on a single
shift basis and employs 125 workers.
2. One unit of switch gear requires 100 hrs. of
production time.
3. It is expected at the beginning of the planning
horizon, there will be a finished goods inventory
of 200 switchgears.
4. Inventory carrying costs are Rs 1000 per
switchgear per month and unit shortage/
backlogging costs are 200 percent of unit
carrying cost.
Devise a level production strategy with constant
work force and constant working hours and
compute the cost of plan.
 Hrs. reqd. per No. of Working Capacity Supply -
Demand unit of Demand working hours per No. of available Demand
Month (in units) production (Hrs.) days day workers (Hrs.) (Hrs.)
April 250 100 25,000 23 8 125 23,000 (2,000)
May 220 100 22,000 22 8 125 22,000 -
June 300 100 30,000 21 8 125 21,000 (9,000)
July 290 100 29,000 24 8 125 24,000 (5,000)
August 260 100 26,000 22 8 125 22,000 (4,000)
September 180 100 18,000 22 8 125 22,000 4,000
October 200 100 20,000 19 8 125 19,000 (1,000)
November 220 100 22,000 23 8 125 23,000 1,000
December 250 100 25,000 21 8 125 21,000 (4,000)
January 200 100 20,000 23 8 125 23,000 3,000
February 240 100 24,000 20 8 125 20,000 (4,000)
March 270 100 27,000 24 8 125 24,000 (3,000)

Total 2880 100 288000 264 8 125 264000 (24,000)

 Supply - Supply -
Demand Demand Opening Closing Average Cost of
Month (Hrs.) (units) Inventory inventory Inventory Inventory

April (2,000) (20) 200 180 190 190,000

May - - 180 180 180 180,000
June (9,000) (90) 180 90 135 135,000
July (5,000) (50) 90 40 65 65,000
August (4,000) (40) 40 - 20 20,000
September 4,000 40 - 40 20 20,000
October (1,000) (10) 40 30 35 35,000
November 1,000 10 30 40 35 35,000
December (4,000) (40) 40 - 20 20,000
January 3,000 30 - 30 15 15,000
February (4,000) (40) 30 (10) 10 30,000
March (3,000) (30) (10) (40) (25) 80,000

Total cost of the plan 825,000

 Example 1.2
 Consider Ex-1.1, assume the switch gear
manufacturer has no opening stock of
inventory and chooses to devise a chase
production strategy.
 Overtime costs are Rs 40 per hour and under

time costs are Rs 20 per hour.

 Hiring and training expenses are Rs 7500 per

worker and laying off costs are Rs 5000 per

worker.
 Evaluate (a) utilizing overtime and under time

alternatives.
(b) Using hiring or laying off alternatives fro
capacity adjustment.
Chase strategy using OT/UT
Supply -
Demand Overtime Undertime
Month (Hrs.) (Hrs) (Hrs) OT/UT cost

April (2,000) 2,000 0 80,000

May - - 0 -
June (9,000) 9,000 0 360,000
July (5,000) 5,000 0 200,000
August (4,000) 4,000 0 160,000
September 4,000 - 4000 80,000
October (1,000) 1,000 0 40,000
November 1,000 - 1000 20,000
December (4,000) 4,000 0 160,000
January 3,000 - 3000 60,000
February (4,000) 4,000 0 160,000
March (3,000) 3,000 0 120,000

Total cost of the plan 1,440,000

 Chase Strategy using Hire/Lay off
Month Demand Capaciy Supply- No. of Under Hir/layoff
Demand workers time & UT
hired (hrs) costs
April 25,000 23,000 (2000) 11 24 82,980
May 22,000 22,000 - - - -
June 30,000 21,000 (9000) 54 72 406,440
July 29,000 24,000 (5000) 27 184 206.180
Aug 26,000 22,000 (4000) 23 48 173,460
Sept 18,000 22,000 4000 - 4000 80,000
Oct 20,000 19,000 (1000) 7 64 53,780
Nov 22,000 23,000 1000 - 1000 20,000
Dec 25,000 21,000 (4000) 24 32 180,640
Jan 20,000 23,000 3000 - 3000 60,000
Feb 24,000 20,000 (4000) 25 - 187,500
March 27,000 24,000 (3000) 16 72 121,440
Total 1,572,420
Example 1.3
 Consider Ex 1.2, Assume that suppose on the
basis of the computations, the switchgear
manufacturer has come up with a plan that
have following alternatives-
1. Hire 25 more workers at the beginning of April.
2. Lay off 25 workers at the end of Sept.
3. Maintain constant working hours (1 shift of 8
hrs) through out the year.
4. Absorb the demand supply mismatch by
building inventory during periods of lean
demand and by resorting OT during periods of
excess demand.
Evaluate cost of this plan?
 Demand CapacityOvertime Average Cost of
Opening (Hrs.) Effective available hours Closing Inventory Inventory
Month (inventory) Demand (hrs.) Inventory
April 0 25000 25,000 27,600 - 26 13 13000
May 26 22000 19,400 26,400 - 70 48 48,000-
June 70 30000 23,000 25,200 - 22 46 46,000
July 22 29000 26,800 28,800
- 20 21 21,000
August
September
20
24
26000
18000
24,000
15,600
26,400
22,000
-
-
24
64
22
44
22,000
44,000
64
October 20000 13,600 19,000
- 54 59, 59,000
November 54 22000 16,600 23,000
- 64 59 59,000
December 64 25000 18,600 21,000
- 24 44 44,000
January
February
24
54
20000
24000
17,600
18,600
23,000
20,000
-
-
54
14
39
34
39,000
34,000
March 14 27000 25,600 24,000 1600 - 7 7,000
 Cost of hiring - 1,87,500
 Cost of lay-off - 1,25,000
 Cost of overtime- 64,000
 Cost of Inventory- 4,36,000
 Total cost - 8,12,500