Lecture 3.2: Aggregate Planning
 Process by which a company determines levels of capacity,
production, subcontracting, inventory, stock-outs, and pricing
over a specified time horizon
 Goal: achieve a production plan that will effectively utilize the
organization’s resources to satisfy demand, leading to maximize
profit
 Time frame of 2 to 18 months
 too late to build another plant
 too early to get into daily/weekly production issues
 Plans how can a firm best use the facilities it has?
Forecast of
aggregate
demand for the
intermediate
range
Develop a
general plan to
meet demand
requirements
Update the
aggregate plan
periodically
(e.g., monthly)
 Specify operational parameters over the time horizon:
 production rate
 workforce
 overtime
 machine capacity level
 subcontracting
 backlog
 inventory on hand
 Given the demand forecast for each period in the planning
horizon, determine the production level, inventory level,
capacity level (internal and outsourced), and any backlogs
(unmet demand) for each period that maximize the firm’s profit
over the planning horizon.
 Specify the planning horizon (typically 2-18 months)
 Specify the duration of each period
 Specify key information required to develop an aggregate plan
 Demand forecast in each period
 Production costs
 machine cost
 labor costs: regular time ($/hr) and overtime ($/hr)
 subcontracting costs ($/hr or $/unit)
 cost of changing capacity: hiring or layoff ($/worker) and cost of
adding or reducing machine capacity ($/machine)
 Labor/machine hours required per unit
 Material requirements per unit, material cost and
availability
 Inventory holding cost ($/unit/period)
 Stock-out or backlog cost ($/unit/period)
 Constraints: limits on overtime, layoffs, capital available,
warehousing, stock-outs and backlogs
 Production quantity from regular time, overtime, and
subcontracted time
 used to determine number of workers and supplier purchase levels
 Inventory held: used to determine how much warehouse
space and working capital is needed
 Backlog/stock-out quantity: used to determine what
customer service levels will be
 Workforce hired/laid off: used to determine any labor
issues likely to be encountered
 Machine capacity increase/decrease: used to determine if
new production equipment needs to be purchased
 A poor aggregate plan can result in lost sales, lost profits,
excess inventory, or excess capacity
 Level capacity strategy: maintaining a steady rate of regular-
time output while meeting variations in demand by a
combination of options
 inventories, overtime, part-time workers, subcontracting, and
back orders
 Chase demand strategy: matching capacity to demand; the
planned output for a period is set at the expected demand for
that period.
 Demand management strategy: attempt to change demand
to fit capacity availability
 Maintain stable machine capacity and workforce levels with a
constant output rate
 Shortages and surpluses result in fluctuations in inventory levels
over time
 Inventories that are built up in anticipation of future demand or
backlogs are carried over from high to low demand periods
 Better for worker morale
 Large inventories and backlogs may accumulate
 Should be used when inventory holding and backlog costs are
relatively low
 Production rate is synchronized with demand by varying machine
capacity or hiring and laying off workers as the demand rate varies
 In practice, often difficult to vary capacity and workforce on short
notice
 Expensive if cost of varying capacity is high
 Negative effect on workforce morale
 Results in low levels of inventory
 Labor utilization is high
 Should be used when inventory holding costs are high and costs of
changing capacity are low
 Pricing
 Promotion
 Back orders
 New demand from  Market growth
 Stealing share
 Forward buying
 Managing capacity
 Time flexibility from workforce : overtime and slack time
 Use of seasonal workforce : hire and lay-off, part-time workers
 Use of subcontracting
 Managing inventory
 Using common components across multiple product
 Build inventory of high-demand or predictable-demand
products
1. Determine demand for each period
2. Determine capacities for each period
3. Identify company or departmental policies that are pertinent
4. Determine unit costs
5. Develop alternative plans and costs
6. Select the plan that best satisfies objectives. Otherwise return
to step 5.
 Input: projected customer demands, equipment capacities,
and labor capabilities.
 Output: time-phased projection of service staff requirements.
 Service organizations that use aggregate planning: Hospitals,
Airlines, Restaurants etc.
 Differences between manufacturing and services:
 Demand for service can be difficult to predict
 Capacity availability can be difficult to predict
 Labor flexibility can be an advantage in services
 Services occur when they are rendered