OM4-1
Aggregate Planning
Chapter 14
Aggregate Planning
OM4-2
Aggregate Planning
Planning Horizon
Aggregate planning: Intermediate-range
capacity planning, usually covering 2 to 12
months.
Long range
Short
range
Now
Intermediate
range
2 months
1 Year
OM4-3
Aggregate Planning
Overview of Planning Levels
• Short-range plans (Detailed plans)
– Machine loading
– Job assignments
• Intermediate plans (General levels)
– Employment
– Output
• Long-range plans
– Long term capacity
– Location / layout
OM4-4
Aggregate Planning
Planning Sequence
Corporate
strategies
and policies
Economic,
competitive,
and political
conditions
Business Plan
Aggregate
demand
forecasts
Establishes production
and capacity strategies
Production plan
Establishes
production capacity
Master schedule
Establishes schedules
for specific products
OM4-5
Aggregate Planning
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
OM4-6
Aggregate Planning
Aggregate Planning Outputs
• Total cost of a plan
• Projected levels of inventory
– Inventory
– Output
– Employment
– Subcontracting
– Backordering
OM4-7
Aggregate Planning
Demand Options
•
•
•
•
Pricing
Promotion
Back orders
New demand
OM4-8
Aggregate Planning
Capacity Options
•
•
•
•
•
Hire and layoff workers
Overtime/slack time
Part-time workers
Inventories
Subcontracting
OM4-9
Aggregate Planning
Aggregate Planning Strategies
• Maintain a level workforce
• Maintain a steady output rate
• Match demand period by period
• Use a combination of decision
variables
OM4-10
Aggregate Planning
Basic Strategies
• Level capacity:
– Maintaining a steady rate of regular-time
output while meeting variations in
demand by a combination of options.
• Chase demand:
– Matching capacity to demand; the
planned output for a period is the
expected demand for that period.
OM4-11
Aggregate Planning
Techniques for Aggregate Planning
•
•
•
•
•
•
Determine demand for each period
Determine capacities for each period
Identify policies that are pertinent
Determine units costs
Develop alternative plans and costs
Select the best plan that satisfies
objectives
OM4-12
Aggregate Planning
Cumulative Graph
Cumulative output/demand
Figure 14-3
1
Cumulative
production
Cumulative
demand
2
3
4
5
6
7
8
9
10
OM4-13
Aggregate Planning
Average Inventory
Average Beginning Inventory + Ending Inventory
=
inventory
2
OM4-14
Aggregate Planning
Aggregate Planning: Problem 1
The Sherman-Brown Chemical Company is about to finalize its aggregate
capacity plan for next year. The company produces three paint products:
latex interior, latex enamel, and latex stain, on a produce-to-stock basis.
The production plant is located in Cleveland, Ohio, where there is an
abundance of workers who perform the duties of material preparation,
mixing, and canning; the principal operations of the production line.
The latex carrier, pigments, cans, boxes, and other materials required to
produce Sherman-Brown's products are also readily available from tried
and proven suppliers in abundant quantities. The processing equipment
in the production department is operated on only one shift because
Sherman-Brown's management bought out a competitor last year, and so
an excess of machine capacity is available. Similarly, ample warehouse
space for holding finished-goods inventory is available.
OM4-15
Aggregate Planning
Aggregate Planning: Problem 1 (cont.)
The capacity situation at Sherman-Brown is this: Because the only
limiting factor in capacity planning is the size of the work force, the only
production capacity issue to be resolved is determining the number of
workers to be employed during each time period to support the sales
forecasts of the three paint products.
Two plans for providing production capacity are currently being
considered by Sherman-Brown's plant manager: (1) level production
and (2) matching capacity with demand. These two alternatives must
be evaluated in terms of which plan results in the lowest total annual
cost while considering three elements of cost: (1) cost of hiring workers
from time period to time period over the entire year, (2) cost of laying
off workers over the same period, (3) cost of carrying the finishedgoods inventory for the entire year.
OM4-16
Aggregate Planning
Aggregate Planning: Problem 1 (cont.)
The pertinent data for this analysis are: working days per quarter: 65;
labor standard per gallon for all types of paint: 2.311 worker-hours per
gallon; working hours per shift: 8 hours per shift per worker; maximum
machine capacity on one shift: 100,000 gallons per quarter for all
types of paint; annual hiring cost per worker: $250; annual layoff cost
per worker: $300; annual inventory carrying cost: $5 per gallon per
year. Assume that the pattern of quarterly demand repeats from year
to year and that the beginning inventory is zero.
OM4-17
Aggregate Planning
Aggregate Planning: Problem 1 (cont.)
The key analyses that must be performed by Sherman-Brown in
developing an aggregate capacity plan are:
1. Develop an aggregate demand forecast from the three individual
product forecasts.
2. Compare the two alternatives for providing production capacity in
the number of workers hired, the number of workers laid off, and the
average finished-goods inventory levels for the entire year.
3. Develop an analysis of the two alternatives for providing production
capacity in terms of their impact on worker employment levels and
finished-goods inventories.
4. Select the capacity plan alternative with the lowest annual cost.
OM4-18
Aggregate Planning
Aggregate Planning: Problem 1
Demand (in gallons)
Aggregate
Quarter Latex Interior Latex Enamel Latex Stain
Demand
1
30,000
2,500
7,500
40,000
2
25,000
20,000
12,500
57,500
3
27,500
20,000
7,500
55,000
4
35,000
10,000
7,500
52,500
Total Demand
205,000
OM4-19
Aggregate Planning
Aggregate Planning: Problem 1 Solution
Working Days per Quarter per Worker: 65
Number of Hours per day: 8
Labor Standard: 2.311
Number of workers =
Output per Quarter * Labor Standard_________
Working Days per Quarter per Worker * Number of Hours per Day
OM4-20
Aggregate Planning
Aggregate Planning: Problem 1 Solution
1
2
3
4
5
8
9
10
11
12
Average
Inventory
Aggregate Planned
Aggregate
Inventory Average
Addition Beginning Ending
Demand Outputs Workers
Plan
Quarter
(gall)
(gall)
Level
1
40,000
51,250
228
Production
2
57,500
51,250
228
or
Required Subtract.
per
Annual
Beginning Inventory Quarter Inventory
(gall)
(gall)
(gall)
11,250
0
11,250
5,625
-6,250
11,250
5,000
8,125
(gall)
4,375
3
55,000
51,250
228
-3,750
5,000
1,250
3,125
4
52,500
51,250
228
-1,250
1,250
0
625
Average
51,250
OM4-21
Aggregate Planning
Aggregate Planning: Problem 1
Solution
1
2
Aggregate
3
4
5
6
7
Aggregate
Planned
Demand
Outputs Workers Workers Workers
Plan
Quarter
(gall)
(gall)
Required
Hired
Laid-off
Matching
Demand
1
40,000
40,000
178
0
56
2
57,500
57,500
256
78
0
3
55,000
55,000
245
0
11
4
52,500
52,500
234
0
11
78
78
OM4-22
Aggregate Planning
Aggregate Planning: Problem 1 Solution
Carrying Cost: $5 per gallon per year
Hiring Cost: $250 per worker
Layoff Cost: $300 per worker
OM4-23
Aggregate Planning
Aggregate Planning: Problem 1 Solution
1
2
3
4
5
6
7
Total
Total
Annual
Number
Aggregate Of Workers
Plan
Hired
Total
Annual
Annual
Number Average
Of
Annual
Workers Inventory
Laid-off
8
(gallons)
Annual
Annual Annual Inventory Incremental
Hiring
Layoff Carrying
Operating
Cost
Cost
Cost
Cost
($)
($)
($)
($)
21,875
21,875
Level
Production
4,375
Matching
Demand
78
78
19,500
23,400
42,900
OM4-24
Aggregate Planning
Aggregate Planning: Problem 2
The Sherman-Brown Chemical Company has been considering
keeping only enough workers employed on straight time per
quarter to produce 40,000 gallons. Either subcontracting or
overtime would be used to supply the difference between the
straight-time production capacity of 40,000 gallons per quarter
and the highly variable quarterly demand. Sherman-Brown will
finish the materials and has a quote from a subcontractor for a
price of $19.50 per gallon for each gallon supplied, and the
subcontractor has guaranteed that it could supply up to 20,000
gallons a quarter. Sherman-Brown's labor union is willing to
work as much overtime as necessary to avoid the use of the
subcontractor. The cost of overtime pay is $9.50 per hour of
overtime worked. Compute the overtime cost and the
subcontracting cost per quarter for the two aggregate plans.
OM4-25
Aggregate Planning
Aggregate Planning: Problem 2 Solution
Cost of Overtime Pay: $9.50 per hour of
overtime
Cost of Subcontracting: $19.50 per gallon
Labor Standard: 2.311 worker hours per gallon
OM4-26
Aggregate Planning
Aggregate Planning: Problem 2 Solution
1
2
3
5
6
7
8
Gallons to be
Straight
Aggregate
Aggregate
Time
Supplied
by Overtime or Cost of
Cost of
Demand Production Subcontracting Overtime Subcontracting
Plan
Quarter
(gall)
(gall)
(gall)
($)
($)
Overtime
1
40,000
40,000
0
0
0
Versus
2
57,500
40,000
17,500
384203.8
341250
Subcontracting
3
55,000
40,000
15,000
329317.5
292500
4
52,500
40,000
12,500
274431.3
243750
Total Cost 987952.5
877500
OM4-27
Aggregate Planning
Mathematical Techniques
Linear programming: Methods for obtaining
optimal solutions to problems involving
allocation of scarce resources in terms of cost
minimization.
Linear decision rule: Optimizing technique
that seeks to minimize combined costs, using
a set of cost-approximating functions to
obtain a single quadratic equation.
OM4-28
Aggregate Planning
Summary of Planning Techniques
Technique
Solution
Characteristics
Graphical/
charting
Trial and
error
Linear
programming
Linear
decision rule
Optimizing
Simulation
Trial and
error
Intuitively appealing, easy to
understand; solution not
necessarily optimal.
Computerized; linear assumptions
not always valid.
Complex, requires considerable
effort to obtain pertinent cost
information and to construct
model; cost assumptions not
always valid.
Computerized models can be
examined under a variety of
conditions.
Optimizing
OM4-29
Aggregate Planning
Aggregate Planning in Services
• Services occur when they are rendered
• Demand for service can be difficult to
predict
• Capacity availability can be difficult to
predict
• Labor flexibility can be an advantage in
services
OM4-30
Aggregate Planning
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.
OM4-31
Aggregate Planning
Master Scheduling Process
Figure 14-5
Inputs
Outputs
Beginning inventory
Forecast
Customer orders
Projected inventory
Master
Scheduling
Master production schedule
Uncommitted inventory
OM4-32
Aggregate Planning
Projected On-hand Inventory
Figure 14-8
Beginning
Inventory
64
Forecast
Customer Orders
(committed)
Projected on-hand
inventory
Customer orders are
larger than forecast in
week 1
1
30
JUNE
2
3
30 30
4
30
5
40
33
20
10
4
2
31
1
-29
JULY
6
7
40 40
8
40
Forecast is larger than
Customer orders in week 3
Forecast is larger than
Customer orders in week 2
OM4-33
Aggregate Planning
Time Fences in MPS
Figure 14-12
Period
1
2
3
frozen
4
5
6
firm
7
8
9
full
10
11
open
12