Supply Chain Management (SCM)
Aggregate Planning
Dr. Husam Arman
1
Today’s Outline
Introduction
 Hierarchy of production planning
decisions
Overview of the Aggregate Planning
Problem
 Planning relationship
Prototype example:
Chase strategy / Constant workforce plan / mix
strategies / LP
2
Aggregate Planning: introduction
Macro and micro planning decisions
Macro: planning workforce, production levels
Micro: what job do we work on today
Aggregate planning addresses the problem of
determining the workforce levels to meet certain
production requirements (produce what, when and how
much
forecast demand)
Competing objectives
React quickly to changes: hire & fire workers (smoothing)
Stability (stable workforce)
build up of inventory during
low demand periods
minimize inventory
Maximize profit, under capacity restrictions
Key concept: manage groups of items rather than single
items – aggregate units of production
3
Hierarchy of production planning
decisions
Forecast of aggregate demand for t period horizon
Aggregate Production Plan
Determination of aggregate production and workforce levels for t
period planning horizon
Master Production Schedule
Production levels by item by time period
Materials Requirements Planning System
Detailed timetable for production and assembly of components
and subassemblies
4
Aggregate units of production
Aggregate planning assumes the existence of
aggregate units of production
•‘Average unit’ (in case types of items are similar)
•Aggregate units in terms of weights (tons of steel),
volume, amount of work required sales ₤ volume …for
different types of items
•Families: Group of items that share a common
manufacturing setup cost; i.e., they have similar production
requirements.
•Aggregate Unit: A fictitious item representing an entire
product family.
•Aggregate Unit Production Requirements: The amount of
(labor) time required for the production of one aggregate
5
unit.
Computing the Aggregate Unit
Production Requirements - example
Washing machine
Model Number
A5532
Required labor time
(hrs)
4.2
Sales Volume ( %)
K4242
4.9
21
L9898
5.1
17
3800
5.2
14
M2624
5.4
10
M3880
5.8
06
32
Aggregate unit labor time = (.32)(4.2)+(.21)(4.9)+(.17)(5.1)+(.14)(5.2)+
(.10)(5.4)+(.06)(5.8) = 4.856 hrs
Overview of the aggregate planning
problem
What do we need?
Demand (aggregate forecasts): assumption
‘known’
Aggregate units: considered ‘available’
Planning horizon (6-12 months)
Costs
Constraints (e.g. bottlenecks, max capacity
etc)
7
Planning Relationships
Business
or annual
plan
Planning Relationships
Business
or annual
plan
Production
or staffing
plan
Planning Relationships
Business
or annual
plan
Production
or staffing
plan
MPS or
workforce
schedule
Planning Relationships
Business
or annual
plan
Production
or staffing
plan
MPS or
workforce
schedule
Planning Relationships
Business
or annual
plan
Production
or staffing
plan
MPS or
workforce
schedule
Managerial Inputs
Operations
Current machine capacities
Plans for future capacities
Workforce capacities
Current staffing level
Materials
Supplier capabilities
Storage capacity
Materials availability
Distribution and marketing
Customer needs
Demand forecasts
Competition behavior
Aggregate
plan
Engineering
New products
Product design changes
Machine standards
Accounting and finance
Cost data
Financial condition
of firm
Human resources
Labor-market conditions
Training capacity
Aggregate Planning Objectives
• Minimize Costs/Maximize Profits
• Maximize Customer Service
• Minimize Inventory Investment
• Minimize Changes in Production Rates
• Minimize Changes in Workforce Levels
• Maximize Utilization of Plant and
Equipment
Why Aggregate Planning Is Necessary
• Fully load facilities & minimize overloading
and underloading
• Make sure enough capacity is available to
satisfy expected demand
• Plan for orderly & systematic change of
production capacity to meet peaks & valleys of
expected customer demand
• Get most output for amount of resources
available
Role of Aggregate Planning
in a Supply Chain
• Given the demand forecast for each period in the
planning horizon, we can determine the
production level, inventory level, and the capacity
level for each period that maximizes the firm’s
(supply chain’s) profit over the planning horizon
• All supply chain stages should work together on
an aggregate plan that will optimize supply chain
performance
Inputs
• A forecast of aggregate demand covering
selected planning horizon (6-18 months)
• Alternative means available to adjust
short- to medium-term capacity, to what
extent each alternative could impact
capacity & related costs
• Current status of system in terms of
workforce level, inventory level &
production rate
Outputs
• Production plan: aggregate decisions for
each period in planning horizon about
– workforce level
– inventory level
– production rate
• Projected costs if production plan was
implemented
Pure Strategies for Informal
Approach
• Matching Demand (Chase Strategy)
• Level Capacity
– Buffering With Inventory
– Buffering With Backlog
– Buffering With Overtime or Subcontracting
Matching Demand Strategy
• Capacity (production) in each time period is varied to
exactly match forecasted aggregate demand in that
time period
• Capacity is varied by changing workforce level
• Finished-goods inventories are minimal
• Labor & materials costs tend to be high due to
frequent changes
Chase Demand
Demand
Units
Production
Time
Developing & Evaluating
the Matching Production Plan
• Production rate is dictated by forecasted
aggregate demand
• Convert forecasted aggregate demand into
required workforce level using production time
information
• Primary costs of this strategy are costs of
changing workforce levels from period to period,
i.e.., hirings & layoffs
Level Capacity Strategy
• Capacity (production rate) is held level
(constant) over planning horizon
• Difference between constant production rate
& demand rate is made up (buffered) by
inventory, backlog, overtime, part-time labor
and/or subcontracting
Level Production
Demand
Units
Production
Time
Developing & Evaluating
Level Production Plan
• Assume that amount produced each period is
constant, no hiring or layoffs
• Gap between amount planned to be produced &
forecasted demand is filled with either inventory or
backorders, i.e., no overtime, no idle time, no
subcontracting
• Primary costs of this strategy are inventory carrying
& backlogging costs
Aggregate Planning Strategies
Possible Alternatives
during Slack Season
Possible Alternatives
during Peak Season
1. Chase #1: vary workforce
level to match demand
2. Chase #2: vary output
rate to match demand
3. Level #1: constant
workforce level
Layoffs
Hiring
Layoffs, undertime,
vacations
No layoffs, building
anticipation inventory,
undertime, vacations
4. Level #2: constant
output rate
Layoffs, building anticipation inventory,
undertime, vacations
Hiring, overtime,
subcontracting
No hiring, depleting
anticipation inventory,
overtime, subcontracting,
backorders, stockouts
Hiring, depleting anticipation inventory, overtime, subcontracting,
backorders, stockouts
Strategy
Aggregate Planning Process
Determine
requirements for
planning horizon
Prepare prospective
plan for
planning horizon
Identify alternatives,
constraints, and costs
No
Move ahead
to next
planning session
Is the plan
acceptable?
Yes
Implement and
update the plan
Figure 14.3
Aggregate Planning Costs
 Regular-time Costs
 Overtime Costs
 Hiring and
Layoff Costs
 Inventory
Holding Costs
 Backorder and Stockout Costs
Pure Strategies
Example:
QUARTER
Spring
Summer
Fall
Winter
Hiring cost
Firing cost
Inventory carrying cost
Regular production cost per pound
Production per employee
Beginning work force
SALES FORECAST (LB)
80,000
50,000
120,000
150,000
= $100 per worker
= $500 per worker
= $0.50 pound per quarter
= $2.00
= 1,000 pounds per quarter
= 100 workers
Level Production Strategy
Level production
(50,000 + 120,000 + 150,000 + 80,000)
4
= 100,000 pounds
QUARTER
SALES
FORECAST
PRODUCTION
PLAN
INVENTORY
Spring
Summer
Fall
Winter
80,000
50,000
120,000
150,000
100,000
100,000
100,000
100,000
400,000
20,000
70,000
50,000
0
140,000
Cost of Level Production Strategy
(400,000 X $2.00) + (140,00 X $.50) = $870,000
Chase Demand Strategy
QUARTER
Spring
Summer
Fall
Winter
SALES
FORECAST
80,000
50,000
120,000
150,000
PRODUCTION
PLAN
WORKERS
NEEDED
WORKERS
HIRED
WORKERS
FIRED
80,000
50,000
120,000
150,000
80
50
120
150
0
0
70
30
100
20
30
0
0
50
Cost of Chase Demand Strategy
(400,000 X $2.00) + (100 x $100) + (50 x $500) = $835,000
Mixed Strategy
• Combination of level production and chase demand
strategies
• Examples of management policies
– no more than x% of the workforce can be laid off in one
quarter
– inventory levels cannot exceed x dollars
• Many industries may simply shut down
manufacturing during the low demand season and
schedule employee vacations during that time
General Linear Programming (LP)
Model
• LP gives an optimal solution, but demand and
costs must be linear
• Let
– Wt = workforce size for period t
– Pt =units produced in period t
– It =units in inventory at the end of period t
– Ft =number of workers fired for period t
– Ht = number of workers hired for period t
Minimize Z =
LP MODEL
$100 (H1 + H2 + H3 + H4)
+ $500 (F1 + F2 + F3 + F4)
+ $0.50 (I1 + I2 + I3 + I4)
+ $2 (P1 + P2 + P3 + P4)
Subject to
Demand
constraints
Production
constraints
Work force
constraints
P1 - I1
I1 + P2 - I2
I2 + P3 - I3
I3 + P4 - I4
1000 W1
1000 W2
1000 W3
1000 W4
100 + H1 - F1
W1 + H2 - F2
W2 + H3 - F3
W3 + H4 - F4
= 80,000
= 50,000
= 120,000
= 150,000
= P1
= P2
= P3
= P4
= W1
= W2
= W3
= W4
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
Other Quantitative Techniques
• Linear decision rule (LDR)
• Search decision rule (SDR)
• Management coefficients model
Hierarchical Nature of Planning
Production
Planning
Capacity
Planning
Resource
Level
Product lines or
families
Sales and
Operations
Plan
Resource
requirements
plan
Plants
Individual
products
Master
production
schedule
Rough-cut
capacity
plan
Critical work
centers
Components
Material
requirements
plan
Capacity
requirements plan
All work
centers
Shop floor
schedule
Input/
output
control
Individual
machines
Items
Manufacturing
operations
•
Disaggregation: process of breaking an aggregate plan into more detailed plans