Aggregate Planning
Intermediate-range capacity planning
Usually covers a period of 12 months.
Long range
Short
range
Now
Intermediate
range
2 months
1 Year
Overview of Planning Levels
• Long-range plans
– Long term capacity
– Location / Layout
• Intermediate plans (Aggregate Planning)
– Manpower Utilization regular time, overtime
– Outsourcing Buying from a third party
– Inventory carrying product for latter periods
– Backlog satisfying the demand of the earlier periods
– Hiring and layoff
• Short-range plans (Scheduling)
– Job assignments
– Machine loading
Aggregate Planning
Aggregate planning is a big picture approach to production
planning.
It is a production plan to meet the demand throughout the
year.
It is not concerned with individual products, but with a single
aggregate product representing all products.
For example, in a TV manufacturing plant, the aggregate
planning does not go into all models and sizes. It only
deals with a single representative aggregate TV. Such an
aggregate TV may even does not exist in reality.
All models are lumped together and represent a single
product; hence the term aggregate planning.
Aggregate Planning
Aggregate approach permits planners to develop intermediaterange capacity planning without being involved in too much
details.
In aggregate planning we are concerned with the quantity and also
timing of demand. Demand is uneven through the year.
Two basic characteristics of aggregate planning
1-Aggregate Product
2-Uneven Demand
It begins with a forecast of aggregate demand for one year. Then
a one year plan is prepared for each month. It includes volume
of output, working hours, overtime, outsourcing, inventories,
back orders, and hiring and layoffs.
Aggregate Planning
1-Demand
2-Regular time production
3-Overtime production
4-Outsourcing; buying from a third party
5-Inventory; production in one period and sale in one or
more later periods.
6-Backlog; production in one period to satisfy the
demand of one or more earlier periods.
7-Hiring and layoffs
A number of aggregate plans are examined in terms of
feasibility and their costs. The best one is selected.
Aggregate Planning : Summary
The question is how to produce to meet the demand. How many
employees, how much overtime, outsourcing, inventories, back
orders?
Basic aggregate planning strategies are:
Level Capacity
Chase Demand
Demand
Time period (year)
Level Capacity
Maintaining a steady rate of output while meeting
variations in demand by a combination of options
Demand
Production
Production
Time period (one year)
Cumulative output/demand
Interesting Observation in Cumulative Graph
Cumulative
production
Cumulative
demand
1
2
3
4
5
6
7
8
9
10
11
12
Interesting Observation in Cumulative Graph
Cumulative output/demand
Give the following demand and production.
Using a line segment show the maximum inventory?
Cumulative
production
Cumulative
demand
1
2
3
4
5
6
7
8
9
10
11
12
Chase Demand
Matching capacity to demand; production in each
period is equal to the expected demand for that
period.
Demand
and
Production
Time period (year)
General Procedure for Aggregate Planning
• Determine demand for each period.
• Determine capacities (regular time, over time,
subcontracting) for each period.
• Identify company’s policies regarding inventories
and work force. How much inventory is allowed?
What rate of overtime and outsourcing is allowed?
• Determine cost of working regular time and over
time work, subcontracting, inventories, back
orders.
• Develop alternative plans, compare them and
select.
Back order (backlog)
Back order cost is the cost of satisfying the demand
of one period in one or more periods later.
It is the cost of loss of goodwill, potential discounts,
backtracking, extra paperwork for transactions, etc.
Back order cost is stated as cost / unit / period
(the same as inventory cost).
Total back order cost per period is
(cost / unit / period) × (total back order in the period).
Problem 1
Demand
1
2
190
230
3
260
4
280
5
210
6
170
7
160
8
260
9
180
Total
1940
There are 20 full time employees, each can produce 10 units per
period at the cost of $6 per unit. Therefore the supply of full time
workers is as follows
1
2
3
4
5
6
7
8
9
Total
200
200
200
200
200
200
200
200
200
1800
Overtime cost is $13 per unit.
Inventory carrying cost $5 per unit per period
Backlog cost $10 per unit per period
Maximum over time production is 20 units per period
Formulated the problem as a Linear Programming model. Using excel
and solver find the optimal solution.