CHAPTER 3 :
AGGREGATE PLANNING
MOHD HAFIZUL BIN TUKIMIN
MOHD SYAFIQ BIN MANSOR
MOHD RUBA’I AMIR BIN SALLEH
CHE MUHD FIRDAUS BIN CHE MAT
OUTLINE
3.1 Introduction
3.2 Aggregate Planning Option
 Demand
 Capacity
3.3 Aggregate Unit of Production
3.4 Technique of Aggregate Planning
 Linear programming : Transportation Method
 Spreadsheet Approach
Disaggregation
3.1 Introduction
Aggregate planning
 Operational activity that does an aggregate plan for
the production process in advance of 2 to 18 months.
 Give an idea to management as to what quantity of
materials and other resources are to be procured and
when.
 To keep the total cost of operations of the organization
to the minimum over that period.
3.1.1Goal of aggregate planning
• Determine the quantity and timing of
production for the immediate future.
• To achieve a production plan which will
effectively utilize the organization’s resources
to satisfy expected demand
3.1.2 Why Aggregate planning
3.1.2.1 Objectives of Aggregate Planning:
– Minimize total cost over the planning horizon.
– Maximize customer service
– Minimize inventory investment
– Minimize changes in workforce levels
– Minimize changes in production rates
– Maximize utilization of plant and equipment
3.2 Aggregate Planning Option
 Capacity - total number of units per time period
that can be produced
 Demand - total number of units needed

If capacity and demand are not balance, must
decide whether:
- To increase or decrease capacity to meet
demand or;
- Decrease demand to meet capacity
Capacity Options – change
capacity
• Varying workforce size by
hiring or lay offs
• Varying production capacity
through overtime
• Subcontracting
• Using part-time workers
• Changing inventory levels
Demand Options – change
demand
• Pricing and promotion
• Back ordering
• New demand creation
3.2.1 Capacity Options
Varying workforce size by
hiring or lay offs
• Hiring additional workers as needed
• Laying off workers not currently required to meet demand
• Match production rate to demand
• New workers may have lower productivity
• Laying off workers may lower morale and productivity
• Allows constant workforce
• Can create temporary increase in capacity without to added
expense of hiring additional worker
Varying production • May be difficult to meet large increases in demand
capacity through
• Overtime can be costly and may drive down productivity
overtime
Cont……Capacity Options
Subcontracting
Using parttime workers
• The amount of capacity or product contacted to subcontractors
• 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
• Utilizing temporary worker / casual labor
• Useful for filling unskilled or low skilled positions, especially in
services
Cont…..Capacity Options
Changing
inventory
levels
• Increase inventory in low demand periods to meet high demand
in the future
• The part of the demand that is not satisfied in the intended period
and is carried forward to the next periods as promised delivery
Backlog
3.2.2 Demand Options
Pricing and promotion
• Varying pricing to increase demand in periods when
demand is less than peak
• Advertising, direct marketing, and other forms of
promotion are used to shift demand.
Back ordering
• Postponing delivery on current orders demands is
shifted to period when capacity is not fully utilized
• Requires customers to wait for an order without loss of
goodwill or the order
Counter seasonal
product and service
mixing
• Develop a product mix of counter seasonal items
• May lead to products or services outside the company’s
areas of expertise
Option
Advantages
Disadvantages
Avoids the costs of other
alternatives.
Hiring, layoff, and training
costs may be significant.
Matches seasonal
fluctuations without
hiring/ training costs.
Overtime premiums; tired
workers; may not meet
demand.
Sub-contracting
Permits flexibility and
smoothing of the firm’s
output.
Loss of quality control;
reduced profits; loss of
future business.
Using part-time
workers
Is less costly and more
flexible than full-time
workers.
High turnover/ training
costs; quality suffers;
scheduling difficult.
Varying workforce
size by hiring or
layoffs
Varying
production rates
through overtime
Changing inventory Changes in human
Inventory holding cost
levels
resources are gradual or may increase. Shortages
none; no abrupt
may result in lost sales.
production changes.
Option
Advantages
Disadvantages
Promotion and
advertising
Tries to use excess
capacity. Discounts
draw new customers.
Uncertainty in demand.
Hard to match demand
to supply exactly.
Back ordering
during highdemand periods
May avoid overtime.
Keeps capacity
constant.
Customer must be willing
to wait, but goodwill is
lost.
Counter seasonal
product and
service mixing
Fully utilizes resources;
allows stable workforce.
May require skills or
equipment outside the
firm’s areas of expertise.
3.4 Aggregate Units of Production
The method is based on notion of aggregate units. They
may be actual units of production
• Weight (tons of steel)
• Volume (gallons of gasoline)
• Dollars (Value of sales)
• Fictitious aggregate units
3.4.1 Example of fictitious aggregate
units:
A plant manager working for a large national appliance
firm is considering implementing an aggregate
planning system to determine the workforce and
production levels in his plant. This particular plant
produces 6 models of TVs. The characteristics of the
TVs are:
Model #
1
2
3
4
5
6
Number of Worker - Hours Required
to produce
4.2
4.9
5.1
5.2
5.4
5.8
Selling Price
$285
$345
$395
$425
$525
$725
The manager notices that the percentages of the total
number of sales for these six models have been fairly
constant:
Model
1
2
3
4
5
6
#
% of the total numbers of sales
32%
21%
17%
14%
10%
6%
To find the particular aggregation scheme
(1) Selling price / Number of worker-hours
required = $ per Input-Hour
Model #
1
2
3
4
5
6
$/hr
$285/4.2 = $67.86
$345/4.9 = $70.41
$395/5.1 = $77.45
$425/5.2 = $81.73
$525/5.4 = $97.22
$725/5.8 = $125.00
Model #
then
1
2
3
4
5
6
$/hr * % of Sales
$67.86* 0.32 = $21.72
$70.41* 0.21 = $14.79
$77.45* 0.17 = $13.17
$81.73* 0.14 = $11.44
$97.22* 0.10 = $9.72
$125.00* 0.06 = $7.50
 $78.34
what is $78.34?
“Average dollars of output / worker-hour input”
in this particular production plant
(2) The manager decides to define an aggregate unit of
production as a fictitious TV
Model #
1
2
3
4
5
6
Number of worker-Hours Required
4.2*0.32 = 1.34
4.9*0.21 = 1.03
5.1*0.17 = 0.87
5.2*0.14 = 0.73
5.4*0.10 = 0.54
5.8*0.06 = 0.35
  $4.86
what is 4.86 hours?
“ Average worker-hours required to produce a fictitious TV”
What if we like to know
“ how many fictitious TV can one worker – one day (8hrs)
produce ? ”
[ 1 / 4.86 ] x 8 = 1.646
• Applications of this Avg. worker-hours/ TV ：
～ If the manager can obtain sales forecast of overall models,
then he can use this to plan workforce ～
3.4 Technique of Aggregate Planning:
3.4.1 Spreadsheet Approach
3.4.2 Linear Programming
3.4.3 Disaggregation
3.4.1 Spreadsheet Approach
Basic Relationships
Workforce
Number of
workers in a
period
=
Number of
workers at end of
previous period
+
Number of
new workers
at start of the
period
-
Number of
laid off
workers at
start of the period
-
Amount used to
satisfy
demand in
current
period
Inventory
Inventory at
the end of
a period
=
Inventory at end
of the
previous
period
=
Output Cost
(Reg+OT+Sub)
+
Production in
current
period
+
Hire/Lay Off
Cost
Cost
Cost for a
period
+
Inventory Cost
+
Back-order
Cost
Example spreadsheet
The Power Star Company makes a variety of cookies . Given the following costs and
monthly sales forecasts, formulate a plan that minimizes cost. They have an inventory from
March of 5000 lb of cookies. Find the total cost of the production.
Quarter
Sales Forecast (lb)
April
90,000
May
80,000
June
150,000
July
100,000
Hiring cost = $300 per worker
Firing cost = $850 per worker
Inventory carrying cost = $1.50 per pound per quarter
Production per employee = 1,000 pounds per quarter
Beginning work force = 95 workers
Solution
3
Example of Spreadsheet Method
•
•
•
There are 15 workers and each can produce 20 skateboards per
period.
Assume a level of output rate of 300 units.
Find the total cost for this plan?
Technique 3: Simulation Example
Level Output
Period
Forecast
1
2
3
4
5
6
200
200
300
400
500
200
Total
1800
Level Output Rate of 300 per
period
Policy:
Output
Cost
Regular
300
300
300
300
300
300
1800
$2
Overtime
$3
Subcontract
$6
Output-Forecast
100
100
0
-100
-200
100
0
Beginning
0
100
200
200
100
0
Ending
100
200
200
100
0
0
Average
50
150
200
150
50
0
600
$1
0
0
0
0
100
0
100
$5
Regular
$600
$600
$600
$600
$600
$600
$3,600
Inventory
$50
$150
$200
$150
$50
$0
$600
Back Orders
$0
$0
$0
$0
$500
$0
$500
Total Cost of Plan
$650
$750
$800
$750
$1,150
$600
$4,700
Inventory
Backlog
Costs
3.4.2 Linear Programming
3.4.2 Linear Programming
3.4.2.1 Transportation Linear Program
Description
1. Carrying costs are $2/tire/month. If goods are made in
one period and held over to the next, holding costs
are incurred
2. Supply must equal demand, so a dummy column
called “unused capacity” is added
3. Because back ordering is not viable in this example,
cells that might be used to satisfy earlier demand are
not available.
4. Quantities in each column designate the levels of
inventory needed to meet demand requirements
5. In general, production should be allocated to the
lowest cost cell available without exceeding unused
capacity in the row or demand in the column
EXERCISE:
solve problem 13.2
page 461
(OPERATION
MANAGEMENT)
A Dover, Delaware, plant has developed the accompanying supply, demand
cost , and inventory data. The firm has a constant workforce and meets all its
demand. Allocate production capacity to satisfy demand at a minimum cost.
What is the cost of this plan?
Supply capacity available (units)
Demand forecast
Perio
d
Regular time
Overtime Subcontract
1
300
50
200
2
400
50
200
3
450
50
200
Other data :
Initial inventory
Regular- time cost per unit
Over time cost per unit
Subcontract cost per unit
Carrying cost per unit per period
Back order cost per unit per period
50 units
$50
$65
$80
$1
$4
Period
Demand (units)
1
450
2
550
3
750
3.4.3 Disaggregation
• Aggregate plans were built to optimal staffing levels
for “families” or groups of products
• Disaggregation is a means to build specific “Master
Production Schedules”
• Typically by breaking down the aggregating weights
to individual parts – or working on schedules of
these families as optimal
• Later leads to values similar to Economic Order
Quantity(EOQ)which will explore in Chapter 4!
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