Aggregate Planning
Production and Operations Planning
Production Process
Design
Long Term
Capacity Planning
Aggregate Planning
Forecast
Master Production
Schedule
Demand
Material Requirements
Planning
Individual Order
Scheduling
The main idea behind aggregate planning
Aggregate planning
Translates business
plans into rough labor
schedules and
production plans
Issues to Consider for Aggregate Planning
Production rate: “aggregate units” per worker per unit time
Workforce level: available workforce in terms of hours
Actual Production: Production rate x Workforce level
Inventory: Units carried over from previous periods
Costs: production, changing workforce, inventory
What does aggregate planning do?
Given an aggregate demand forecast , determine production
levels, inventory levels, and workforce levels, in order to
minimize total relevant costs over the planning horizon
Given the number
of variables, there is
not a single optimal
solution!
Aggregate Planning Strategies
1. Chase strategy: match production rate to production
requirements by varying the workforce (no inventory
buildup or shortage allowed)
2. Level strategy: keep a constant workforce who work at
maximum capacity (inventory will vary from period to
period); workforce level chosen such that the total
requirement over the planning horizon can be exactly met
3. Stable workforce: keep a constant workforce who work at
maximum capacity; outsource in order to match production
and requirements (no inventory buildup or shortage
allowed); workforce level chosen such that they can
exactly satisfy the requirements in the period with the
minimum requirement level
Example: CA&J Company…
Demand Forecast
Working Days
JAN
FEB
MAR APR
MAY
JUN
Total
1,800
1,500
1,100
900
1,100
1,600
8,000
22
19
21
21
22
20
125
Costs
Inventory
Inventory holding
$1.50/unit/month
Backorders
$5.00/unit/month
Hiring and training
$200.00/worker
Layoff
$250.00/worker
Labor time required
0.20 units/hour
Straight time cost (8 hours)
$4.00/hour
Outsourcing
$20.00/unit
Beginning Inventory 400 units
Labor
Beginning Labor
40 workers
First step: Analyze the requirements…
JAN
Beginning Inventory
Demand Forecast
FEB
MAR
APR
MAY
JUN
1,500
1,100
900
1,100
1,600
400
1,800
Production requirement
Ending Inventory
Production requirement = Forecast – Beginning Inventory
Ending Inventory = Beginning Inventory + Production Requirement – Forecast
First step: Analyze the requirements…
JAN
FEB
MAR
APR
MAY
JUN
400
0
0
0
0
0
Demand Forecast
1,800
1,500
1,100
900
1,100
1,600
Production requirement
1,400
1,500
1,100
900
1,100
1,600
0
0
0
0
0
0
Beginning Inventory
Ending Inventory
Plan 1: Chase strategy (variable workforce)
Production requirement
JAN
FEB
MAR
APR
MAY
JUN
1,400
1,500
1,100
900
1,100
1,600
22
19
21
21
22
20
Production hours required
Days per month
Worker hours per month
Workers required
Workers hired
Hiring cost
Workers laid off
Layoff cost
Labor cost
Plan 1: Chase strategy
JAN
FEB
MAR
APR
MAY
JUN
Production requirement
1,400
1,500
1,100
900
1,100
1,600
Production hours required
7,000
7,500
5,500
4,500
5,500
8,000
Days per month
22
19
21
21
22
20
Worker hours per month
176
152
168
168
176
160
Workers required
40
49
33
27
31
50
Workers hired
0
9
0
0
4
19
Hiring cost
0
1800
0
0
800
3,800
Workers laid off
0
0
16
6
0
0
Layoff cost
0
0
4,000
1,500
0
0
Labor cost
28,000
30,000
22,000
18,000
22,000
32,000
Plan 1: Chase strategy
Hiring cost
6,400
Layoff cost
5,500
Labor cost
152,000
Total Cost
163,900
Plan 2: Level strategy
JAN
FEB
MAR
APR
MAY
JUN
Beginning inventory
400
Working days per month
22
19
21
21
22
20
1,800
1,500
1,100
900
1,100
1,600
Production hours available
Monthly production level
Demand Forecast
Ending Inventory
Shortage Cost
Inventory cost
Labor cost
Plan 2: Level strategy
Number of workers required
= Total hours required over planning horizon/(8*total days)
= 38,000/(8*125) = 38. This is the no. of workers for each month
JAN
FEB
MAR
APR
MAY
JUN
Beginning inventory
400
-62
-407
-230
147
385
Working days per month
22
19
21
21
22
20
Production hours available
6688
5776
6384
6,384
6,688
6,080
Monthly production level
1,338
1,155
1,277
1,277
1,338
1,216
Demand Forecast
1,800
1,500
1,100
900
1,100
1,600
Ending Inventory
-62
-407
-230
147
385
1
Shortage Cost
310
2035
1150
0
0
0
Inventory cost
0
0
0
220.5
577.5
1.5
26752
23104
25536
25536
26752
24320
Labor cost
Plan 2: Level strategy
Layoff cost
500
Shortage
cost
3,495
Inventory
cost
798
Labor cost
152,000
Total Cost
156,793
Plan 3: Stable strategy with outsourcing
JAN
FEB
MAR
APR
MAY
JUN
Production requirement
1,400
1,500
1,100
900
1,100
1,600
Working days per month
22
19
21
21
22
20
Monthly production hours
Monthly production level
Monthly outsourcing level
Monthly outsourcing cost
Monthly labor cost
Plan 3: Stable strategy with outsourcing
Number of workers
= enough workers to cover requirements in April
= 900*5/(21*8)
= 27 workers (this is the no. of workers for each month)
JAN
FEB
MAR
APR
MAY
JUN
Production requirement
1,400
1,500
1,100
900
1,100
1,600
Working days per month
22
19
21
21
22
20
Monthly production hours
4,752
4,104
4,536
4,536
4,752
4,320
Monthly production level
950
821
907
907
950
864
Monthly outsourcing level
450
679
193
-
150
736
Monthly outsourcing cost
9,000
13,580
3,860
0
3,000
14,720
Monthly labor cost
19,008
16 416
18,144
18,144
19,008
17,280
Plan 3: Stable strategy with outsourcing
Layoff Cost
3,250
Outsourcing
Cost
44,160
Labor Cost
108,000
Total Cost
155,410
Comparison
Layoff cost
500
Hiring cost
6,400
Shortage
cost
3,495
Layoff Cost
3,250
Layoff cost
5,500
Inventory
cost
798
Outsourcing
Cost
44,160
Labor cost
152,000
Labor cost
152,000
Labor cost
108,000
Total Cost
163,900
Total Cost
156,793
Total Cost
155,410
Chase
Level
Stable
“Sensitivity Analysis”
WHAT IF…
… outsourcing costs increase or decrease?
… the holding costs are higher?
… the hiring costs are lower?
… the firing costs are higher?
We can always plug the data in and re-calculate the costs