Aggregate Planning

Dr. Richard Jerz

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Learning Objectives

• Aggregate planning• How to do aggregate planning• Graphic technique for aggregate planning• Mathematical techniques for aggregate planning

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Stages of Planning

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Overview of Planning Levels

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Long-range plans (over one year)Research & DevelopmentNew product plansCapital investmentFacility location/expansion

Intermediate-range plans (3 to 18 months)Sales planningProduction planning and budgetingSetting employment, inventory,

subcontracting levelsAnalyzing cooperating plans

Short-range plans (up to 3 months)Job assignmentsOrderingJob schedulingDispatchingOvertimePart-time help

Top executives

Operations managers

Operations managers, supervisors, foremen

ResponsibilityResponsibility Planning tasks and horizonPlanning tasks and horizon

Long-range plans (over one year)Research & DevelopmentNew product plansCapital investmentFacility location/expansion

Intermediate-range plans (3 to 18 months)Sales planningProduction planning and budgetingSetting employment, inventory,

subcontracting levelsAnalyzing cooperating plans

Short-range plans (up to 3 months)Job assignmentsOrderingJob schedulingDispatchingOvertimePart-time help

Top executives

Operations managers

Operations managers, supervisors, foremen

ResponsibilityResponsibility Planning tasks and horizonPlanning tasks and horizon

Planning Horizon

• Aggregate planning: Intermediate‐range capacity planning, usually covering 2 to 12 months.

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Shortrange

Intermediate range

Long range

Now 2 months 1 Year

Aggregate Planning

• Combines appropriate resources into general terms

• Part of a larger production planning system• Disaggregation breaks the plan down into greater detail

• Disaggregation results in a master production schedule

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Aggregate Planning

• Determine the quantity and timing of production for the immediate future

• Objective is to minimize cost over the planning period by adjusting• Production rates• Labor levels• Inventory levels• Overtime work• Subcontracting• Other controllable variables

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Aggregate Planning Requirements  

• A logical overall unit for measuring sales and output

• A forecast of demand for intermediate planning period in these aggregate units

• A method for determining costs• A model that combines forecasts and costs so that scheduling decisions can be made for the planning period

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Aggregate Planning Inputs

• Resources• Workforce• Facilities

• Demand forecast• Policy statements

• Subcontracting• Overtime• Inventory levels• Back orders

• Costs• Inventory carrying• Back orders• Hiring/firing• Overtime• Inventory  changes• subcontracting

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Aggregate Planning

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Aggregate Planning Strategies

• Use inventories to absorb changes in demand• Accommodate changes by varying workforce size

• Use part‐timers, overtime, or idle time to absorb changes

• Use subcontractors and maintain a stable workforce

• Change prices or other factors to influence demand

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Changing Inventory Levels

• Increase inventory in low demand periods to meet high demand in the future

• Increases costs associated with storage, insurance, handling, obsolescence, and capital investment

• Shortages can mean lost sales due to long lead times and poor customer service

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Workforce Hiring & 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

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Vary Production –Overtime/Idle 

• 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

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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

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Using Part‐time Workers

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

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Demand Options

• Use advertising or promotion to increase demand in low periods

• Attempt to shift demand to slow periods• 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• Counter‐seasonal product mixing

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Aggregate Planning Techniques

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Technique Solution Characteristics Graphical/charting

Trial anderror

Intuitively appealing, easy tounderstand; solution notnecessarily optimal.

Linearprogramming

Optimizing Computerized; linear assumptionsnot always valid.

Lineardecision rule

Optimizing Complex, requires considerableeffort to obtain pertinent costinformation and to constructmodel; cost assumptions notalways valid.

Simulation Trial anderror

Computerized models can beexamined under a variety ofconditions.

Graphical/Charting Methods

• Popular techniques• Easy to understand and use• Trial‐and‐error approaches that do not guarantee an optimal solution

• Require only limited computations• Sometimes called the “tableau method”

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Tableau Method

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Aggregate Planning Number of periods: 6

Period 1 2 3 4 5 6 TotalForecast 200 200 300 400 500 200 1,800Output

Regular 300 300 300 300 300 300 1,800Part Time 0Overtime 0Subcontract 0

Output - Forecast 100 100 0 -100 -200 100 0Inventory

Beginning 100 200 200 100 0Ending 100 200 200 100 0 0Average 50.0 150.0 200.0 150.0 50.0 0.0 600

Backlog 0 0 0 0 100 0 100Costs:

Regular @ 2 600 600 600 600 600 600 3,600Part Time @ 0 0 0 0 0 0 0Overtime @ 3 0 0 0 0 0 0 0Subcontract @ 6 0 0 0 0 0 0 0Hire/Layoff 0Inventory @ 1 50.0 150.0 200.0 150.0 50.0 0.0 600.0Back orders @ 5 0 0 0 0 500 0 500

Total 750.0 800.0 750.0 1,150.0 600.0 4,700.0

1 2 3 4 5 6Cumulative Forecast 200 400 700 1,100 1,600 1,800Cumulative Production 300 600 900 1,200 1,500 1,800Ending Inventory 100 200 200 100Backlog 100

Aggregate Planning - Costs

0

200

400

600

800

1,000

1,200

1,400

1 2 3 4 5 6

Regular Part Time OvertimeInventory Hire/Layoff InventoryBack orders

Clear

0200400600800

1,0001,2001,4001,6001,8002,000

1 2 3 4 5 6

Cum Forecast Cum Production

Steps for Tableau Method

1. Determine the demand for each period2. Determine the capacity for regular time, 

overtime, and subcontracting each period3. Find labor costs, hiring and layoff costs, and 

inventory holding costs4. Consider company policy on workers and 

stock levels5. Develop alternative plans and examine their 

total costs

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Aggregate Planning in Services

• Controlling the cost of labor is critical• Close scheduling of labor‐hours to assure quick response to customer demand

• Some form of on‐call labor resource• Flexibility of individual worker skills• Individual worker flexibility in rate of output or hours

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Disaggregation

• Breaks the aggregate plan into greater detail• Transforms the master production schedule into an aggregate plan

• Calculates the optimal price points for yield management

• Converts product schedules and labor assignments to a facility‐wide plan

• Is an assumption required for the use of the transportation model in aggregate planning

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Disaggregating 

• Master schedule: The result of disaggregating an aggregate plan; shows quantity and timing of specific end items for a scheduled horizon.

• Rough‐cut capacity planning: Approximate balancing of capacity and demand to test the feasibility of a master schedule.

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