Chapter 13 – Aggregate
Planning
Operations Management
by
R. Dan Reid & Nada R. Sanders
2nd Edition © Wiley 2005
PowerPoint Presentation by R.B. Clough - UNH
What is Aggregate Planning?
Aggregate planning is intermediaterange (2 to 12 months) capacity
planning useful in particular for
organizations that experience seasonal
or other fluctuation in demand.
The goal of aggregate planning is to
effectively utilize the organization’s
resources to satisfy expected demand.
The Role of the Aggregate Plan
The Concept of Aggregation
Aggregate planning is a “big picture”
approach that does not focus on
individual products or services. Instead,
the focus is on groups of similar
products of an entire product line.
Examples:


Total number of bikes produced
Total number of customers served
Responses to Demand
Fluctuations


Demand-based options are intended to
alter (smooth) the pattern of the
demand.
Capacity-based options to alter capacity
to better match the demand.
Demand-based Options

Finished goods inventories:


Back orders & lost sales:


Delay delivery or allow demand to go
unfilled when demand exceeds capacity
Shift demand to off-peak times:


To meet anticipate high demand
Proactive marketing: pricing, promotions
Create new (complementary) demand
Capacity-based Options

Overtime: Short-term option


Idle time: Short-term option



Pay workers a premium to work longer hours
Slow the production rate or send workers home
early (lowers labor productivity, but doesn’t tie up
capital in finished good inventories)
Subcontracting: Medium-term option
Hire & fire workers: Long-term option

Change the size of the workforce
Aggregate Plan Strategies

Level plans:



Use a constant workforce & produce similar
quantities each time period.
Use inventories & backorders to absorb
demand peaks & valleys
Chase plans:

Minimize finished good inventories by
trying to keep pace with demand
fluctuations
Hybrid Strategies

Use a combination of options:




Build-up inventory ahead of rising demand
& use backorders to level extreme peaks
Layoff or furlough workers during lulls
Subcontract production or hire temporary
workers to cover short-term peaks
Reassign workers to preventive
maintenance during lulls
Developing Aggregate Plan

Choose the basic strategy:


Level, chase, or hybrid
Determine the production rate:



Level plan with back orders: rate = average
demand over the planning horizon
Level plan without back orders: rate is set to meet
all demand on time
Chase plan: assign regular production, amount of
overtime & subcontracted work to meet demand
Developing the Aggregate
Plan




Calculate the size of the workforce needed
Calculate period-to-period inventory levels,
shortages, expected hiring & firings, and
overtime
Calculate period-by-period costs, then sum
for total costs of the plan
Evaluate the plan’s impact on customer
service and human resource issues
Evaluating Alternative Plans


Level strategy plan
Chase strategy plan
Aggregate Planning Example
Period
Demand
1
3000
Beginning Inventory
Beginning Workforce
Labor Standard (units/worker)
2500
18
250
Costs
Regular Time Labor Cost
Overtime/Subcontracting
Inventory Holding Cost
Backorders
Hiring
Layoff
Cost
Per Unit
$9.60
$14.40
$5.00
$7.50
$500.00
$750.00
2
6000
3
2000
4
1500
5
4000
6
5500
7
8500
Aggregate Planning Template
Aggregate Production Planning
Costs
Regular Time Labor Cost
Overtime/Subcontracting
Inventory Holding Cost
Backorders
Hiring
Layoff
Beginning Inventory
Beginning Workforce
Labor Standard (units/worker)
Cost
Per Unit
Total
Units
Total
Cost
Total Costs
Period
Demand
Cumulative Demand
Net Cumulative Demand
Production/Inventory Planning
Production
Cumulative Production
Inventory (Excess Units)
Backorders (Units Short)
Capacity Planning
Workers Hired
Workers Layed Off
Workforce Available
Regular Time Capacity (units)
Overtime/Subcontracting (units)
Total Production Capacity (units)
1
2
3
4
5
6
7
8
Level Strategy
Aggregate Production Planning
Costs
Regular Time Labor Cost
Overtime/Subcontracting
Inventory Holding Cost
Backorders
Hiring
Layoff
Cost
Total
Total
Per Unit Units
Cost
$9.60 28000 $268,800
$14.40
0
$0
$5.00 25000 $125,000
$7.50
0
$0
$500.00
0
$0
$750.00
2
$1,500
Total Costs
$395,300
Beginning Inventory
Beginning Workforce
Labor Standard (units/worker)
2500
18
250
Period
Demand
Cumulative Demand
Net Cumulative Demand
1
3000
3000
500
2
6000
9000
6500
3
2000
11000
8500
4
1500
12500
10000
5
4000
16500
14000
6
5500
22000
19500
7
8500
30500
28000
Production/Inventory Planning
Production
Cumulative Production
Inventory (Excess Units)
Backorders (Units Short)
4000
4000
3500
0
4000
8000
1500
0
4000
12000
3500
0
4000
16000
6000
0
4000
20000
6000
0
4000
24000
4500
0
4000
28000
0
0
Capacity Planning
Workers Hired
Workers Layed Off
Workforce Available
Regular Time Capacity (units)
Overtime/Subcontracting (units)
Total Production Capacity (units)
0
2
16
4000
0
4000
0
0
16
4000
0
4000
0
0
16
4000
0
4000
0
0
16
4000
0
4000
0
0
16
4000
0
4000
0
0
16
4000
0
4000
0
0
16
4000
0
4000
8
Non-Financial Criteria

Operations perspective:


Human resources perspective:


Smooth & even flow is easy to manage
Nobody hired or fired, no overtime or furloughs,
so employee morale should be fine
Marketing perspective:

All demand met, so no customer service issues
Chase Strategy
Aggregate Production Planning
Costs
Regular Time Labor Cost
Overtime/Subcontracting
Inventory Holding Cost
Backorders
Hiring
Layoff
Cost
Total
Total
Per Unit Units
Cost
$9.60 28000 $268,800
$14.40
0
$0
$5.00
0
$0
$7.50
0
$0
$500.00
50 $25,000
$750.00
34 $25,500
Total Costs
$319,300
Beginning Inventory
Beginning Workforce
Labor Standard (units/worker)
2500
18
250
Period
Demand
Cumulative Demand
Net Cumulative Demand
1
3000
3000
500
2
6000
9000
6500
3
2000
11000
8500
4
1500
12500
10000
5
4000
16500
14000
6
5500
22000
19500
7
8500
30500
28000
Production/Inventory Planning
Production
Cumulative Production
Inventory (Excess Units)
Backorders (Units Short)
500
500
0
0
6000
6500
0
0
2000
8500
0
0
1500
10000
0
0
4000
14000
0
0
5500
19500
0
0
8500
28000
0
0
Capacity Planning
Workers Hired
Workers Layed Off
Workforce Available
Regular Time Capacity (units)
Overtime/Subcontracting (units)
Total Production Capacity (units)
0
16
2
500
0
500
22
0
24
6000
0
6000
0
16
8
2000
0
2000
0
2
6
1500
0
1500
10
0
16
4000
0
4000
6
0
22
5500
0
5500
12
0
34
8500
0
8500
8
Non-Financial Criteria

Operations perspective:



Human resources perspective:



Can operations ramp up & back down this quickly?
Much more difficult to accomplish
Will employees tolerate being hired & fired so
rapidly?
What about training & learning curve issues?
Marketing perspective:

All demand is met (assuming no strikes)
A Minimum Cost Plan
(Hybrid Strategy)
Aggregate Production Planning
Cost
Total
Total
Costs
Per Unit Units
Cost
Regular Time Labor Cost
$9.60 28000 $268,800
Overtime/Subcontracting
$14.40
0
$0
Inventory Holding Cost
$5.00
2750 $13,750
Backorders
$7.50
0
$0
Hiring
$500.00
28 $14,000
Layoff
$750.00
12
$9,000
Total Costs
$305,550
Beginning Inventory
Beginning Workforce
Labor Standard (units/worker)
2500
18
250
Period
Demand
Cumulative Demand
Net Cumulative Demand
1
3000
3000
500
2
6000
9000
6500
3
2000
11000
8500
4
1500
12500
10000
5
4000
16500
14000
6
5500
22000
19500
7
8500
30500
28000
Production/Inventory Planning
Production
Cumulative Production
Inventory (Excess Units)
Backorders (Units Short)
3250
3250
2750
0
3250
6500
0
0
2000
8500
0
0
1500
10000
0
0
4000
14000
0
0
5500
19500
0
0
8500
28000
0
0
Capacity Planning
Workers Hired
Workers Layed Off
Workforce Available
Regular Time Capacity (units)
Overtime/Subcontracting (units)
Total Production Capacity (units)
0
5
13
3250
0
3250
0
0
13
3250
0
3250
0
5
8
2000
0
2000
0
2
6
1500
0
1500
10
0
16
4000
0
4000
6
0
22
5500
0
5500
12
0
34
8500
0
8500
8
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
Service Planning Issues


Intangible products can’t be inventoried
Possible approaches:



Try to proactively shift demand away from
peaks
Use overtime or subcontracting to handle
peaks
Allow lost sales
Chapter 13 HW Assignment
Problems
1 – 5, 10 -12.