Chapter 13 –
Aggregate Planning
Operations Management
by
R. Dan Reid & Nada R. Sanders
3rd Edition © Wiley 2007
Types of Operational
Planning Activities

13-4
ACTIVITY

TIME FRAME

Long-range planning

18 months – 5+ years

Medium-range planning

6-18 months

Short-range planning

1 day – 6 months
Production
Planning
The Role of the Aggregate Plan
Aggregate Planning

Based on composite (representative)
products:



Simplifies calculations
Forecasts for grouped items are more accurate
Considers trade-offs between holding
inventory & short-term capacity based on
workforce
Aggregate Production Planning

Purpose: specify the combination of
production rate, workforce level, and
inventory on-hand that satisfies the
forecasted demand at the lowest cost.



Production rate: quantity of product produced
per unit of time (autos/day).
Workforce level: number of workers required to
meet a specific level of output.
Inventory on hand: unsold units carried over
from one period to the next.
Managing Demand




13-6
Pricing
Advertising and Promotion
Backlogs and Reservations
Develop Alternative Products
Managing Supply
(Capacity)






13-7
Overtime/Undertime
Hiring/Firing of Personnel
Temporary/Part-time Personnel
Subcontracting
Adjusting Inventories
Adjusting Lead Times
Aggregate Planning:
Objectives and Approaches

Objectives:



Match Supply and Demand (Effectiveness)
Minimize Costs (Efficiency)
Approaches

Reactive approach:


Proactive approach:

13-5
Allow volume forecasts based on Marketing plan to
drive production planning
Coordinate Marketing & Production plans to level
demand using advertising & price incentives
Aggregate Plan Strategies

Chase strategy:


Match the production rate to meet the
demand rate by adjusting the workforce level
(hiring/firing) as the demand rate changes.
Minimize finished good inventories by
matching demand fluctuations.
Level strategy:

Use a stable workforce working at a constant
production rate. Use inventories and
backorders to absorb demand peaks and
valleys.
Pure Aggregate Strategies
Chase Plan Example


Chase hires and fires staff to exactly meet each
periods demand
Period 1 = (500 units x .64 std.)/160 = 2 people,
need to fire 16 people
Level Plan Example


Level production rate= 28,000 units/7 periods= 4000 units
Level workforce= (4000 units x .64 std.)/160 = 16 people
Hybrid Strategies

Combine elements of the chase/level
strategies with other options:


Stable workforce but variable work rate
(overtime/undertime).
Subcontract production or hire part-time or
temporary workers to cover short-term peaks.
Preliminary Considerations

Identify the point of departure:



How much capacity is currently in use?
Identify the magnitude of change needed
Identify the anticipated duration the
modified capacity is necessary
Developing the Aggregate Plan




Step
Step
Step
Step
1234-
Choose strategy: level, chase, or Hybrid
Determine the aggregate production rate
Calculate the size of the workforce
Test the plan as follows:



Calculate Inventory, expected hiring/firing, overtime needs
Calculate total cost of plan
Step 5- Evaluate performance: cost, service,
human resources, and operations
Aggregate Planning Costs




Basic production costs (fixed and variable):
material costs, labor costs, overtime pay.
Production rate-change costs: hiring, training,
layoff/firing, adding/cutting shifts.
Inventory holding costs: cost of capital, storage,
insurance, taxes, spoilage, shrinkage,
obsolescence.
Backlog costs: expediting, loss of customer
goodwill, loss of sales revenue from cancelled
orders (due to product unavailability).
Aggregate Planning Techniques


Trial-and error (usually employing
spreadsheets): costing out various
production planning scenarios to determine
which has the lowest cost.
Mathematical approaches:



Linear programming.
Linear decision rule (LDR).
Heuristic approaches.
Plan for Companies with Tangible
Products – Plans A, B, C, D




Plan A: Level aggregate plan using
inventories and back orders
Plan B: Level plan using inventories but no
back orders
Plan C: Chase aggregate plan using hiring
and firing
Plan D: Hybrid plan using initial workforce
and overtime as needed
Problem Data for Plans A, B, C, D
(Table 13.4)
A
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
B
Cost Data
Regular time labor cost per hour
Overtime labor cost per hour
Subcontracting cost per unit (labor only)
Back order cost per unit per period
Inventory holding cost per unit per period
Hiring cost per employee
Firing cost per employee
Capacity Data
Beginning workforce (employees)
Beginning inventory (units)
Production standard per unit (hours)
Regular time available per period (hours)
Overtime available per period (hours)
$12.50
$18.75
$125.00
$25.00
$10.00
$800.00
$500.00
90
0
8
160
40
Demand Data (units)
Period
Period
Period
Period
Period
Period
Period
Period
1
2
3
4
5
6
7
8
Total Number of Periods
1920
2160
1440
1200
2040
2400
1740
1500
8
Plan A - Level Using Inventory &
Backorders (Table 13-5)

First calculate the level production rate (14400/8=1800)
D
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
E
F
G
H
I
J
K
L
M
5
2040
8760
1800
9000
-240
240
0
6
2400
11160
1800
10800
360
0
360
7
1740
12900
1800
12600
300
0
300
8
1500
14400
1800
14400
0
0
0
Total
14400
Plan A: Level Aggregate Plan, Using Inventories and Backorders
Compute Level Production Rate
Total Demand
Less: Beginning Inventory
Total Net Demand
Average Demand Per Period
14400
0
14400
1800
Compute Workforce Needed
Units per Employee per Period
Employees Required
Number to Hire
Number to Fire
20
90
0
0
<-- Production Rate for Level Plan
Detailed Plan Computations
Demand (units) (net of beg. Inventory)
Cumulative demand (units)
Period production (units)
Cumulative production (units)
Cum.Dem. Minus Cum.Prod.
Ending Inventory (units)
Backorders (units)
Cost Calculations for Plan A
Regular time labor cost
Overtime labor cost
Inventory holding cost
Back order cost
Hiring cost
Firing cost
Total Cost
1
1920
1920
1800
1800
120
0
120
$1,440,000
$0
$7,200
$34,500
$0
$0
$1,481,700
2
2160
4080
1800
3600
480
0
480
Period
3
4
1440
1200
5520
6720
1800
1800
5400
7200
120
-480
0
480
120
0
14400
720
1380
Plan A Evaluation

Back orders were 13.9% of demand (1380)



Marketing will not be satisfied at these levels
Workable plan for operations


Worst performance was period 2 at 21% of demand
No employees hired or fired, no overtime or undertime
needed, and output is constant
No human resource problems are anticipated
Plan B – Level, Inventory but
No Backorders (Table 13-7)

Set the level rate equal to the peak cumulative demand/period
D
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
E
F
G
H
I
J
K
L
M
5
2040
8760
1752
2040
10200
-1440
1440
0
6
2400
11160
1860
2040
12240
-1080
1080
0
7
1740
12900
1842.857
2040
14280
-1380
1380
0
8
1500
14400
1800
2040
16320
-1920
1920
0
Total
14400
Plan B: Level Aggregate Plan, Using Inventories but No Backorders
Detailed Plan Computations
Demand (units) (net of beg. Inventory)
Cumulative demand (units)
Cumulative demand/periods
Period production (units)
Cumulative production (units)
Cum.Dem. Minus Cum.Prod.
Ending Inventory (units)
Backorders (units)
1
1920
1920
1920
2040
2040
-120
120
0
Compute Level Production Rate and Workforce Needed
Production Rate (units)
2040
Units per Employee per Period
20
Employees Needed
102
Number to Hire
12
Number to Fire
0
Cost Calculations for Plan B
Regular time labor cost
Overtime labor cost
Inventory holding cost
Back order cost
Hiring cost
Firing cost
Total Cost
$1,632,000
$0
$79,800
$0
$9,600
$0
$1,721,400
2
2160
4080
2040
2040
4080
0
0
0
Period
3
4
1440
1200
5520
6720
1840
1680
2040
2040
6120
8160
-600
-1440
600
1440
0
0
16320
7980
0
N
Plan B Evaluation





Plan B costs $240K (16%) more than plan A and
has ending inventory of 7980 units
To be fair, Plan B built 1920 additional units
($192K) which will be sold later
Plan B costs $2.58 more per unit (2.5%)
Marketing satisfied by 100% service level
Workable Operations and HR plan- hire 12, no OT
or UT, and level production
Plan C – Chase Using Hires and
Fires (Table 13- 9)

The production rate equals the demand each period
D
E
F
G
H
I
J
K
68 Plan C: Chase Aggregate Plan, Using Hiring and Firing (no overtime)
69
70
Beginning Number of Employees
90
71
Units per Worker per Period
20
(used to compute workforce size requirement each period)
72
73 Detailed Plan Computations
Period
74
1
2
3
4
5
6
7
75
Demand (units) (net of beg. Inventory)
1920
2160
1440
1200
2040
2400
1740
76
Production per period (units)
1920
2160
1440
1200
2040
2400
1740
77
Employees needed in period
96
108
72
60
102
120
87
78
Number to hire
6
12
0
0
42
18
0
79
Number to fire
0
0
36
12
0
0
33
80
81 Cost Calculations for Plan C
82
Regular time labor cost
$1,440,000
83
Overtime labor cost
$0
84
Inventory holding cost
$0
85
Back order cost
$0
86
Hiring cost
$62,400
87
Firing cost
$46,500
88
Total Cost
$1,548,900
89
L
M
8
1500
1500
75
0
12
Total
14400
720
78
93
N
Plan C Evaluation



Costs an additional $2 per unit more than Plan B
Marketing is satisfied again by 100% service level
From Operations and HR standpoint, not easy to
implement:



Need space, tools, equipment for up to 120 people in
period 6 and only have 60 people in period 4
High training costs and potential quality problems
Low morale likely due to poor job security
Plan D– Hybrid, Initial Workforce
and OT as Needed (Table 13-12)

This is basically a level plan using OT to avoid backorders
D
E
F
G
H
I
91 Plan D: Hybrid Aggregate Plan, Using Initial Workforce and Overtime as Needed
92
93 Compute Regular Time Production Rate
94
Number of Employees
90
95
Units per Employee per Period
20
96
Regular Time Production per Period
1800
97
98 Detailed Plan Computations
Period
99
1
2
3
4
5
100
Total Demand in Period
1920
2160
1440
1200
2040
101 Net Demand After Inventory Considered
1920
2160
1440
840
1080
102
Regular Time Production
1800
1800
1800
1800
1800
103
Overtime Production Needed
120
360
0
0
0
104
Ending Inventory
0
0
360
960
720
105
106 Cost Calculations for Plan C
107
Regular time labor cost
$1,440,000
108
Overtime labor cost
$72,000
109
Inventory holding cost
$28,200
110
Back order cost
$0
111
Hiring cost
$0
112
Firing cost
$0
113
Total Cost
$1,540,200
114
J
K
L
M
6
2400
1680
1800
0
120
7
1740
1620
1800
0
180
8
1500
1320
1800
0
480
Total
14400
14400
480
2820
N
Plan D Evaluation


Cost is only $.61 (.6%) more than Plan A with a
reasonable increase in ending inventory (+1440)
Marketing is satisfied as well with 100% service
level

Not difficult for Operations to implement

Does not need excessive overtime


Uses overtime in just periods 1 and 2 (7%, 20%)
Aggregate Plan Objective: Keep customer
service high and costs low
Aggregate Plans for Service Companies
with Non-Tangible Products- Plans E, F, G

Options remain the same – level, chase,
and hybrid plans




Overtime and undertime can be used
Staff can be hired and fired
Inventory cannot be used to level the
service plan
All demand must be satisfied or lose
business to a competing service provider
Problem Data for Plans E, F, G
(Table 13.4)
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
A
Cost Data
Regular time labor cost per hour
Overtime labor cost per hour
Subcontracting cost per unit (labor only)
Hiring cost per employee
Firing cost per employee
Capacity Data
Beginning workforce (employees)
Service standard per call (hours)
Regular time available per period (hours)
Overtime available per period (hours)
B
$8.00
$12.00
$60.00
$250.00
$150.00
60
4
160
24
Demand Data (calls)
Period
Period
Period
Period
Period
Period
Period
Period
1
2
3
4
5
6
7
8
Total Number of Periods
2400
1560
1200
2040
2760
1680
1320
2400
8
Plan E – Level with Staffing for Peak
Demand- (Table 13-14)
D
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24


E
F
G
H
I
J
K
L
M
Plan E: Level Aggregate Plan with No Backorders, No Tangible Product
Compute Workforce Needed
Maximum Demand
Calls per Worker per Period (Reg Time)
Workers Needed
Number to Hire
Number to Fire
2760
40
69
9
0
Detailed Plan Computations
Demand (calls)
Service hours needed
Regular time hours available
Undertime hours
Cost Calculations for Plan E
Regular time labor cost
Hiring cost
Firing cost
Total Cost
1
2400
9600
11040
1440
<-- Need to staff to meet the maximum number of calls
Period
2
3
4
5
6
7
8
Total
1560
1200
2040
2760
1680
1320
2400 15360
6240
4800
8160 11040 6720
5280
9600 61440
11040 11040 11040 11040 11040 11040 11040
4800
6240
2880
0
4320
5760
1440 26880
$706,560
$2,250
$0
$708,810
Staff of 69 people creates excessive UT (30%)
Cost per service call is $46.15
Plan F – Hybrid with Initial Workforce
and OT as Needed (Table 13-16)
D
E
F
G
H
I
J
26 Plan F: Hybrid Aggregate Plan Using Initial Workforce and Overtime as Needed
27
28 Detailed Plan Computations
Period
29
1
2
3
4
5
6
30
Demand (calls)
2400
1560 1200 2040 2760 1680
31
Service hours needed
9600
6240 4800 8160 11040 6720
32
Regular time hours of capacity
9600
9600 9600 9600 9600 9600
33
Overtime hours needed
0
0
0
0 1440 0
34
Undertime hours
0
3360 4800 1440 0 2880
35
36 Cost Calculations for Plan F
37
Regular time labor cost
$614,400
38
Overtime labor cost
$17,280
39
Total Cost
$631,680


Costs reduced by $77K and undertime to 20%
Cost per service call reduced to $41.13 (-$5.02)
K
L
M
7
8 Total
1320 2400 15360
5280 9600 61440
9600 9600 76800
0
0 1440
4320 0 16800
Plan G – Chase Plan with Hiring and
Firing (Table 13-18)
D
42 Plan G: Chase Aggregate Plan Using
43
44
Beginning Number of Employees
45
46 Detailed Plan Computations
47
48
Demand (calls)
49
Service hours needed
50
Number of employees needed
51
Number of hires
52
Number of fires
53
54 Cost Calculations for Plan G
55
Regular time labor cost
56
Hiring cost
57
Firing cost
58
Total Cost



E
F
G
H
I
J
K
L
6
1680
6720
42
0
27
7
1320
5280
33
0
9
8
2400
9600
60
27
0
Hiring and Firing
60
1
2400
9600
60
0
0
2
1560
6240
39
0
21
Period
3
4
5
1200 2040 2760
4800 8160 11040
30
51
69
0
21
18
9
0
0
$491,520
$16,500
$9,900
$517,920
Total cost reduced by $114K over Plan F, utilization improved to
100%, and cost per service call $33.72 (-$7.41)
Workforce fluctuates from 30-69 people- morale problems
Solution?? Compare smaller permanent workforce, more OT??
Aggregate Planning Bottom Line



The Aggregate plan must balance several
perspectives
Costs are important but so are:

Customer service

Operational effectiveness

Workforce morale
A successful AP considers each of these factors
Planning Links to MPS
Role of the MPS

Aggregate plan:


Specifies the resources available (e.g.: regular
workforce, overtime, subcontracting, allowable
inventory levels & shortages)
Master production schedule:


Specifies the number & when to produce each
end item (the anticipated build schedule)
Disaggregates the aggregate plan
Objectives of Master Schedule

The Master Scheduler must:




Maintain the desired customer service level
Utilize resources efficiently
Maintain desired inventory levels
The Master Schedule must:



Satisfy customer demand
Not exceed Operation’s capacity
Work within the constraints of the Aggregate
Plan
Developing an MPS

The Master Scheduler:

Develops a proposed MPS
Checks the schedule for feasibility with available
capacity
Modifies as needed

Authorizes the MPS



Consider the following example:



Make-to-stock environment with fixed orders of 125
units
There are 110 in inventory to start
When are new order quantities needed to
satisfy the forecasted demand?
The MPS Record
W eek
BI
1
2
3
4
5
6
7
8
9
10
11
12
50
50
50
50
75
75
75
75
50
50
50
50
110
60
10
-4 0
BI
1
2
3
4
5
6
7
8
9
10
11
12
50
50
50
50
75
75
75
75
50
50
50
50
60
10
85
35
-4 0
F o re c a s t
P ro je c t e d a va ila b le
MPS
W eek
F o re c a s t
P ro je c t e d a va ila b le
MPS


110
125
Projected Available = beginning inventory + MPS shipments forecasted demand
The MPS row shows when replenishment shipments need to arrive to avoid a
stock out (negative projected available)
Revised and Completed MPS Record
W eek
BI
F o re c a s t
P ro je c te d a va ila b le
110
1
2
3
4
5
6
7
8
9
10
11
12
50
50
50
50
75
75
75
75
50
50
50
50
60
10
85
35
85
10
-6 5
MPS
W eek
125
BI
F o re c a s t
P ro je c te d a va ila b le
MPS
110
125
1
2
3
4
5
6
7
8
9
10
11
12
50
50
50
50
75
75
75
75
50
50
50
50
60
10
85
35
85
10
60
110
60
10
85
35
125
125
125
125
125
Evaluating the MPS

Rough-cut capacity planning:



An estimate of the plan’s feasibility
Given the demonstrated capacity of critical
resources (e.g.: direct labor & machine time),
have we overloaded the system?
Customer service issues:

Does “available-to-promise” inventory satisfy
customer orders? If not, can future MPS
quantities be pulled in to satisfy new orders?
Rough Cut Capacity Problem: a shoe company produces two models of
dance shoes. Over the past 3 years 72,000 pairs of Model M have been
produced using 21,600 direct labor hours and 5760 machine hours, and
108,000 pairs of Model W using 43,200 hours of labor and 12,960 hours of
machine time.

Step 1: Determine the Planning factors:

Labor Factors
Total DL hours building model
number of units built
21,6000 hours
43,200 hours
DL PF M 
 0.30 hour ; DL PF W 
 0.40 hour
72,000 pairs
108,000 pairs
Direct Labor Planning Factor 

Machine Factors
Total machine hours building model
number of units built
5760 hours
12,960
Machine PF M 
 0.08hour ; MachinePF W 
 0.12hour
72,000 pairs
108,000
Machine Planning Factor 
Step 2:Calculate the Workload Generated
by This Schedule
A
B
C
Planning Factors (hours per pair)
Direct Machine
Labor
Time
Model M 0.30
0.08
Model W 0.40
0.12
D
E
4
5
6
7
8
9
10 Quarterly Master Production Schedule (MPS) (pairs)
11
Q1
Q2
Q3
Q4
12
Model M 6000
5500
9500
6500
13 Model W 10000
12000
7500
10100
F
Totals
27500
39600
Step 3: Calculate the Capacity Needs for
Each Resource for Each Time Period
A
B
C
Direct Labor Hours Required
Q1
Q2
Model M 1800
1650
Model W 4000
4800
Totals 5800
6450
15
16
17
18
19
20
21 Machine Time (Hours) Required
22
Q1
Q2
23
Model M
480
440
24
Model W 1200
1440
25
Totals 1680
1880
D
E
F
Q3
2850
3000
5850
Q4
1950
4040
5990
Totals
8250
15840
24090
Q3
760
900
1660
Q4
520
1212
1732
Totals
2200
4752
6952
Step 4: Calculate Individual Workcenter
Capacity Needs Based on Historical
Percentage Allocation
A
B
C
D
E
27 Work Center Historical Breakdown
28
Direct
Machine
29
Labor
Time
30 Center 101
60%
60%
31 Center 102
40%
40%
32
33 Direct Labor Hours Required by Work Center
34
Q1
Q2
Q3
Q4
35 Center 101
3480
3870
3510
3594
36 Center 102
2320
2580
2340
2396
37
Totals
5800
6450
5850
5990
38
39 Machine Time Hours Required by Work Center
40
Q1
Q2
Q3
Q4
41 Center 101
1008
1128
996
1039.2
42 Center 102
672
752
664
692.8
43
Totals
1680
1880
1660
1732
F
Totals
14454
9636
24090
Totals
4171.2
2780.8
6952
Using the MPS to “Order Promise”




The authorized MPS is used to promise orders to customers
The MPS table is expanded to add customer orders and available-topromise rows (inventory to satisfy new orders)
ATPAction Bucket = (beginning inventory + MPS shipment) – (customer
orders before next replenishment). Available in period 1
ATP=MPS shipment – Customer orders between current MPS shipment and
next scheduled replenishment. Available in periods 3,5,7,8, & 11
W eek
1
2
3
4
5
6
7
8
9
10
11
12
F o re c a s t
50
50
50
50
75
75
75
75
50
50
50
50
C u s t o m e r o rd e rs
35
25
25
20
0
15
0
0
10
0
0
10
60
10
85
35
85
10
60
110
60
10
85
35
P ro je c t e d a va ila b le
A va ila b le -t o -p ro m is e
MPS
BI
110
50
80
110
125
115
115
125
125
125
125
125
Example of Revising the ATP MPS Record: A customer calls
marketing willing to purchase 200 units if they can be delivered in
period 5. The two tables below show how the system logic would
first slot the 200 into period 5 and then how the order would be
allocated across periods 1, 3, and 5 and adjusting the ATP row.
Stabilizing the MPS
Aggregate Planning Across the
Organization

Aggregate planning, MPS, and rough-cut capacity
affection functional areas throughout the
organization



Accounting is affected because aggregate plan details
the resources needed by operations
Marketing as the aggregate plan supports the
marketing plan
Information systems maintains the databases that
support demand forecasts and other such information
Chapter 13 Homework Hints

These problems are based on The BackPack Company.




Problem 13.1: level strategy allowing backorders. Calculate
the production rate and workforce level. Develop the plan,
calculate the costs, and evaluate the strategy.
Problem 13.3-4: chase strategy. 3) Calculate the production
rate and workforce levels. 4) Develop the plan, calculate the
costs, and evaluate the strategy.
Problem 13.5: chase strategy using overtime. Calculate the
production rate and workforce level, develop the plan,
calculate the costs, and evaluate the strategy.
Problem 13.22: using the data given, calculate the
projected available and the available-to-promise
(ATP).