Aggregate Planning in a

8 Supply Chain

PowerPoint presentation
to accompany
Chopra and Meindl
Supply Chain Management, 6e
Copyright © 2016 Pearson Education, Inc. 8–1
 Learning Objectives
1. Understand the importance of aggregate
planning as a supply chain activity.
2. Describe the information needed to produce an
aggregate plan and the outputs obtained.
3. Explain the basic trade-offs to consider when
creating an aggregate plan.
4. Formulate and solve basic aggregate planning
problems using Microsoft Excel.

Copyright © 2016 Pearson Education, Inc. 8–2

 Role of Aggregate Planning
in a Supply Chain
• Capacity has a cost and lead times are often long
• Aggregate planning:
– process by which a company determines levels of capacity,
production, subcontracting, inventory, stockouts, and pricing
over a specified time horizon
– goal is to maximize profit
– decisions made at a product family (not SKU) level
– time frame of 3 to 18 months
– how can a firm best use the facilities it has?

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 Role of Aggregate Planning
in a Supply Chain
• Identify operational parameters over the specified
time horizon
– Production rate – Subcontracting
– Workforce – Backlog
– Overtime – Inventory on hand
– Machine capacity level
• All supply chain stages should work together on an
aggregate plan that will optimize supply chain
performance

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 The Aggregate Planning Problem
• Given the demand forecast for each period in the planning
horizon, determine the production level, inventory level,
and the capacity level for each period that maximizes the
firm’s (supply chain’s) profit over the planning horizon
• Specify the planning horizon (typically 3-18 months)
• Specify the duration of each period
• Specify key information required to develop an aggregate
plan

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 Information Needed for
an Aggregate Plan
• Aggregate demand forecast Ft for each Period t over T periods
• Production costs
– Labor costs, regular time ($/hr) and overtime ($/hr)
– Subcontracting costs ($/hr or $/unit)
– Cost of changing capacity – hiring or layoff ($/worker), adding or
reducing machine capacity ($/machine)
• Labor/machine hours required per unit
• Inventory holding cost ($/unit/period)
• Stockout or backlog cost ($/unit/period)
• Constraints – overtime, layoffs, capital available, stockouts,
backlogs, from suppliers

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 Outputs of Aggregate Plan
• Production quantity from regular time, overtime,
and subcontracted time
• Inventory held
• Backlog/stockout quantity
• Workforce hired/laid off
• Machine capacity increase/decrease

• A poor aggregate plan can result in lost sales, lost

profits, excess inventory, or excess capacity

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 Identifying Aggregate Units of
Production
• Aggregate unit should be identified in a way
that the resulting production schedule can be
accomplished in practice
• Focus on the bottlenecks when selecting the
aggregate unit and identifying capacity and
production times
• Account for activities such as setups and
maintenance

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 Red Tomato Tools

Setup Net
Material Time/B Average Production Production Percentage
Cost/ Revenue/ atch Batch Time/ Unit Time/Unit Share of
Family Unit ($) Unit ($) (hour) Size (hour) (hour) Units Sold
A 15 54 8 50 5.60 5.76 10

B 7 30 6 150 3.00 3.04 25

C 9 39 8 100 3.80 3.88 20

D 12 49 10 50 4.80 5.00 10

E 9 36 6 100 3.60 3.66 20

F 13 48 5 75 4.30 4.37 15

TABLE 8-1

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 Red Tomato Tools

• Weighted average approach

Material cost per aggregate unit
= (15 x 0.10) + (7 x 0.25) + (9 x 0.20)
+ (12 x 0.10) + (9 x 0.20) + (13 x 0.15)
= $10
• Similarly
Revenue per aggregate unit = $40
Net production time per aggregate unit = 4.00 hours

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 Aggregate Planning Strategies
• Trade-off between capacity, inventory,
backlog/lost sales
• Chase strategy – using capacity as the lever
• Flexibility strategy – using utilization as the
lever
• Level strategy – using inventory as the lever
• Tailored or hybrid strategy – a combination of
strategies

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 Chase Strategy
• Vary machine capacity or hire and lay off workers
as demand varies
• Often difficult to vary capacity and workforce on
short notice
• Expensive if cost of varying capacity is high
• Negative effect on workforce morale
• Results in low levels of inventory
• Used when inventory holding costs are high and
costs of changing capacity are low

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 Time Flexibility Strategy
• Use excess machine capacity
• Workforce stable, number of hours worked varies
• Use overtime or a flexible work schedule
• Flexible workforce, avoids morale problems
• Low levels of inventory, lower utilization
• Used when inventory holding costs are high and
capacity is relatively inexpensive

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 Level Strategy
• Stable machine capacity and workforce levels,
constant output rate
• Inventory levels fluctuate over time
• Inventories carried over from high to low
demand periods
• Better for worker morale
• Large inventories and backlogs may accumulate
• Used when inventory holding and backlog costs
are relatively low

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 Aggregate Planning Using
Linear Programming
• Red Tomato Tools
– Highly seasonal demand
– Develop a forecast

Month Demand Forecast

January 1,600
February 3,000
March 3,200
April 3,800
May 2,200
June 2,200

TABLE 8-2
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 Red Tomato Tools

Item Cost
Material cost $10/unit
Inventory holding cost $2/unit/month
Marginal cost of stockout/backlog $5/unit/month
Hiring and training costs $300/worker
Layoff cost $500/worker
Labor hours required 4/unit
Regular time cost $4/hour
Overtime cost $6/hour
Cost of subcontracting $30/unit

TABLE 8-3

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 Red Tomato Tools
Decision Variables
For t = 1, ..., 6
Wt = Workforce size for month t
Ht = Number of employees hired at the beginning of
month t
Lt = Number of employees laid off at the beginning
of month t
Pt = Production in month t
It = Inventory at the end of month t
St = Number of units stocked out at the end of
month t
Ct = Number of units subcontracted for month t
Ot = Number of overtime hours worked in month t
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 Red Tomato Tools
Objective Function
• Minimize
(Regular-time labor cost) + (Overtime labor cost) + (Cost of
hiring and layoffs) + (Cost of holding inventory) + (Cost of
stocking out) + (Cost of subcontracting) + (Material cost)

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 Red Tomato Tools
Constraints
All for t = 1,..., 6
1. Workforce, hiring, and layoff constraints

2. Capacity constraints

3. Inventory balance constraints

4. Overtime limit constraints

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 Red Tomato Tools
Total cost over planning horizon = $422,660

No.
No. Laid Total
Hired, Off, Workforce Overtime, Inventory, Stockout, Subcontract, Production, Demand,
Period, t Ht Lt Size, Wt Ot It St Ct Pt Dt

0 0 0 80 0 1,000 0 0
1 0 16 64 0 1,960 0 0 2,583 1,600
2 0 0 64 0 1,520 0 0 2,583 3,000
3 0 0 64 0 880 0 0 2,583 3,200
4 0 0 64 0 0 220 140 2,583 3,800
5 0 0 64 0 140 0 0 2,583 2,200
6 0 0 64 0 500 0 0 2,583 2,200

TABLE 8-4

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 Red Tomato Tools
• Higher demand variability
Month Demand Forecast
January 1,000
February 3,000
March 3,800
April 4,800
May 2,000
June 1,400

TABLE 8-5

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 Red Tomato Tools
Total cost over planning horizon = $433,080

No.
No. Laid Total
Hired, Off, Workforce Overtime, Inventory, Stockout, Subcontract, Production, Demand,
Period, t Ht Lt Size, Wt Ot It St Ct Pt Dt

0 0 0 80 0 1,000 0 0
1 0 16 64 0 2,560 0 0 2,560 1,000
2 0 0 64 0 2,120 0 0 2,560 3,000
3 0 0 64 0 880 0 0 2,560 3,800
4 0 0 64 0 0 1,220 140 2,560 4,800
5 0 0 64 0 0 660 0 2,560 2,000
6 0 0 64 0 500 0 0 2,560 1,400

TABLE 8-6

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 Red Tomato Tools
• Lower hiring and layoff costs – $50
Total cost over planning horizon = $412,770

No.
No. Laid Total
Hired, Off, Workforce Overtime, Inventory, Stockout, Subcontract, Production, Demand,
Period, t Ht Lt Size, Wt Ot It St Ct Pt Dt

0 0 0 80 0 1,000 0 0
1 0 35 45 0 1,200 0 0 1,800 1,600
2 0 0 45 0 0 0 0 1,800 3,000
3 42 0 87 0 280 0 0 3,480 3,200
4 1 0 88 0 0 0 0 3,520 3,800
5 0 27 61 0 240 0 0 2,440 2,200
6 0 0 61 0 500 0 20 2,440 2,200

TABLE 8-7

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 Aggregate Planning In Excel

Copied to
Output Cells Relationship to inputs Formula in Row 5 Calls
Workforce D5:D10 Wt = Wt_1 + Ht – Lt = D4 + B5 – C5 D6:D10
Production I5:I10 Pt = 40 x Wt + Ot/4 = 40*D5 + (E5/4) I6:I10
Inventory F5:F10 It = max(It–1 + Pt + Ct = max(F4 + I5 + H5 F6:F10
– Dt – St–1, 0) – G4 – J5, 0)

Stockout G5:G10 St = max(0, St–1 + Dt = max(0,J5 + G4 – I5 G6:G10

– It–1 – Pt – Ct – H5 – F4

TABLE 8-8

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 Aggregate Planning Using Solver
For t = 1, ..., 6
Wt = Workforce size for Month t
Ht = Number of employees hired at the beginning of
Month t
Lt = Number of employees laid off at the beginning
of Month t
Pt = Production in Month t
It = Inventory at the end of Month t
St = Number of units stocked out at the end of
Month t
Ct = Number of units subcontracted for Month t
Ot = Number of overtime hours worked in Month t
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 Aggregate Planning Using Solver

FIGURE 8-1

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 Aggregate Planning Using Solver

FIGURE 8-2

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 Aggregate Planning Using Solver
• Set Target Cell: C22
• Equal to: Select Min
• By Changing Cells: B5:I10
• Subject to the constraints:
• B5:C10 = integer {Number of workers hired or laid off is integer}
• B5:I10 ≥ 0 {All decision variables are nonnegative}
• F10 ≥ 500 {Inventory at end of Period 6 is at least 500}
• G10 = 0 {Stockout at end of Period 6 equals 0}
• M5:M10 = 0 {W1 – Wt–1 –Ht + Lt = 0 for t = 1,...,6}
• N5:N10 ≥ 0{40Wt + Ot/4 – Pt ≥ 0 for t = 1, . . . , 6}
• O5:O10 = 0{It–1 – St–1 + Pt + Ct – Dt – It + St = 0 for t = 1, . . . , 6}
• P5:P10 ≥ 0{10Wt – Ot ≥ 0 for t = 1,…, 6}
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 Aggregate Planning Using Solver

FIGURE 8-2

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 Aggregate Planning Using Solver

FIGURE 8-4

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 Aggregate Planning Using Solver

FIGURE 8-5

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 Forecast Error in Aggregate Plans
• Forecast errors must be considered
• Safety inventory
– Build and carry extra inventories as a form of safety
inventory
• Safety capacity
– Use overtime as a form of safety capacity
– Carry extra workforce permanently as a form of safety
capacity
– Use subcontractors as a form of safety capacity
– Purchase capacity or product from an open or spot
market as a form of safety capacity

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 Building a Rough Master Production
Schedule
• Disaggregate an aggregate plan
Setup
Time/Ba Production Number Setup
tch Average Time/Unit Production of Time Production
Family (hour) Batch Size (hour) Quantity Setups (hours) Time (hours)
A 8 50 5.60 256 5 40 1,433.6
B 6 150 3.00 640 4 24 1,920.0
C 8 100 3.80 512 5 40 1,945.6
D 10 50 4.80 256 5 50 1,228.8
E 6 100 3.60 512 5 30 1,843.2
F 5 75 4.30 384 5 25 1,651.2

TABLE 8-9

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 The Role of IT in
Aggregate Planning
• The ability to handle large problems
• The ability to handle complex problems
(through either nonlinear optimization or
linear approximations)
• The ability to interact with other core IT
systems such as inventory management and
sourcing

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 Implementing Aggregate Planning
in Practice
1. Think beyond the enterprise to the entire
supply chain
2. Make plans flexible because forecasts are
always inaccurate
3. Rerun the aggregate plan as new data
emerge
4. Use aggregate planning as capacity
utilization increases

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 Summary of Learning Objectives
1. Understand the importance of aggregate planning
as a supply chain activity.
2. Describe the information needed to produce an
aggregate plan.
3. Explain the basic trade-offs to consider when
creating an aggregate plan.
4. Formulate and solve aggregate planning problems
using Microsoft Excel.

Copyright © 2016 Pearson Education, Inc. 8 – 36