LESSON 8: AGGREGATE PLANNING
Outline
• Aggregate Planning
– Issues
– Costs
• Two Strategies
– Chase Strategy
– Level Strategy
• Optimization
Aggregate Production Planning
• Chapter 2 discusses forecasting. If the demand for a
product changes over time, we need to plan the resource
capacity the firm will need over time.
• Aggregate production planning determines the resource
capacity a firm may need to meet its demand.
• Aggregate production planning is a short term decision
making process. The planning horizon is typically 6 to 12
months.
• Since the planning horizon is short, it is usually not
feasible to build or shut down plants, purchase or sell
equipment, etc.
Aggregate Production Planning
• However, capacity may be adjusted in some other ways. It
is usually possible to
– hire or lay off workers
– increase or decrease number of shifts
– increase or decrease number of working days in a
week
– increase or decrease working hours (overtime or
undertime)
– subcontract work to other firms
– build up or deplete inventory levels
• Aggregate production planning meets the requirement of
resource capacity using the above.
Aggregate Production Planning
• The term aggregate refers to the fact that the plan is
developed for a line of products, not just one individual
product. For example, suppose that a firm produces three
types of chairs: ladder-back chair, kitchen chair and desk
chair. If an aggregate production plan is required for the
chairs, the plan may consider an aggregate unit of chair. It
will specify how many aggregate units of chair will be
produced in various planning periods.
• An aggregate unit is some kind of an “average” unit.
Different products of the same product line may require
different amount of worker/machine time, raw materials,
etc. and their selling prices may also be different. It is not
always very obvious what the aggregating scheme should
be.
Aggregate Production Planning
• An example of an aggregation scheme is given in Example
3.1, pp. 114-115 of the text. A firm produces 6 different
models of washing machines
Model
Number
A5532
K4242
L9898
L3800
M2624
M3880
Working
Hours Required
4.2
4.9
5.1
5.2
5.4
5.8
Individual/Total Sales
Ratio
0.32
0.21
0.17
0.14
0.10
0.06
Aggregate Production Planning
• The manager decides to define an aggregate unit of
production as a fictitious machine requiring some weighted
total working hours where the weights are taken from the
individual/total sales ratio given in the previous slide.
0.32(4.2)
+ 0.21(4.9)
+ 0.17(5.1)
+ 0.14(5.2)
+ 0.10(5.4)
+ 0.06(5.8)
= 4.856 hours
Hierarchy of Production Decisions
• The next slide presents a schematic view of the aggregate
production planning function and its place in the hierarchy
of the production planning decisions.
• Forecasting: First, a firm must forecast demand for
aggregate sales over the planning horizon.
• Aggregate planning: The forecasts provide inputs for
determining aggregate production and workforce levels
over the planning horizon.
• Master production schedule (MPS): Recall, that the
aggregate production plan does not consider any “real”
product but a “fictitious” aggregate product. The MPS
translates the aggregate plan output in terms of specific
production goals by product and time period. For example,
Hierarchy of Production Decisions
Forecast of Demand
Aggregate Planning
Master Production Schedule
Inventory Control
Operations Scheduling
Vehicle Routing
Hierarchy of Production Decisions
suppose that a firm produces three types of chairs: ladderback chair, kitchen chair and desk chair. The aggregate
production considers a fictitious aggregate unit of chair and
find that the firm should produce 550 units of chairs in April.
The MPS then translates this output in terms of three
product types and four work-weeks in April. The MPS
suggests that the firm produce 200 units of desk chairs in
Week 1, 150 units of ladder-back chair in Week 2, and 200
units of kitchen chairs in Week 3.
• Material Requirements Planning (MRP): A product is
manufactured from some components or subassemblies.
For example a chair may require two back legs, two front
legs, 4 leg supports, etc. While forecasting, aggregate plan
Hierarchy of Production Decisions
Master Production Schedule
April
1
Ladder-back chair
2
3
Aggregate
production plan
for chair family
4
5
150
6
7
8
150
200
Kitchen chair
Desk chair
May
200
120
120
200
550
200
790
Hierarchy of Production Decisions
and MPS consider the volume of finished products, MRP
plans for the components, and subassemblies. A firm may
obtain the components by in-house production or
purchasing. MRP prepares a plan of in-house production or
purchasing requirements of components and
subassemblies.
• Scheduling: Scheduling allocates resource over times in
order to produce the products. The resources include
workers, machines and tools.
• Vehicle Routing: After the products are produced, the firm
may deliver the products to some other manufacturers, or
warehouses. The vehicle routing allocates vehicles and
prepares a route for each vehicle.
Hierarchy of Production Decisions
Materials Requirement Planning
Back
legs
Front
legs
Back slats
Seat cushion
Leg supports
Seat-frame
boards
Issues in Aggregate Planning
• Smoothing
– Smoothing refers to costs that result from changing
workforce level
– Two of the key components of smoothing costs are
costs associated with hiring and firing workers
– Firing workers could have far-reaching consequences
and the costs may be difficult to evaluate
• Bottleneck problems
– Bottleneck refers to the inability of the system to
respond to sudden changes in demand
– For example, a bottleneck may arise if the demand in
one month is suddenly so high that the plant does not
have sufficient capacity to meet the demand
Issues in Aggregate Planning
• Planning horizon
– Inaccurate forecasts are associated with too large
planning horizon and planning may be ineffective with
too small planning horizon
– To minimize the inventory holding cost during the
planning horizon, the aggregate plan may recommend
zero inventory at the end of the planning horizon. This
is known as the end-of-horizon effect. This may be a
poor strategy, specially if demand increases at that
time.
– Often, rolling schedules are used. In a rolling schedule,
a plan is prepared for several periods more than the
planning horizon over which the plan will be
Issues in Aggregate Planning
implemented. At the time of the next decision, a new
forecast is appended and old forecasts may be revised.
The new plan may recommend different production and
workforce levels than were recommended earlier.
– Often, it desired that because of production lead times
that the schedule be frozen for a certain number of
planning periods. Then, production and workforce
levels over the frozen horizons cannot be changed.
• Nature of Demand
– Aggregate planning ignores the possibility of forecast
errors. Assuming deterministic demand, aggregate
planning can incorporate seasonal fluctuations and
business cycles into the planning function.
Aggregate Production Planning
• Input
– Demand forecast
– Level of resources available
– Relevant cost information
• Output
– Aggregate production quantities
• production, inventory, backorder
– Level of resources needed
• Workforce, overtime, machine capacity level,
subcontracting
Costs in Aggregate Planning
• Smoothing costs
– Hiring costs
• Time and cost to advertise positions
• Interview candidates
• Train new recruits
– Firing costs
• Severance pay
• The costs of a decline in worker morale
• The potential for decreasing the size of the labor
pool in the future
Sl
op
e
Cost
Costs in Aggregate Planning
Smoothing Costs
=
un
it
f
iri
ng
co
st
Number of fires
e
p
o
Sl
=
g
n
i
ir
h
it
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s
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Number of hires
Costs in Aggregate Planning
• Inventory holding costs
– Opportunity cost of capital
– Cost of storage space
– Taxes and insurance against fire, theft, and other
losses
– Breakage, spoilage, deterioration and obsolescence
– Example of calculation of inventory holding costs
Cost of capital 15%
Taxes and insurance 2%
Storage 5%
Breakage/spoilage 3%
Total 25%
Costs in Aggregate Planning
• Shortage costs
– Shortages occur when the demand exceeds the
production capacity. One of two types of costs is
charged depending on whether a shortage results in
loss of sales or not:
• Backorder - if the excess demand is backlogged and
fulfilled in a future period, backorder cost is charged
(bookkeeping and/or delay costs).
• Lost sales - if the excess demand is lost because
the customer goes elsewhere, the lost sales is
charged. The lost sales include goodwill and loss
profit margin (=selling price - unit variable cost)
co
st
e
op
Sl
Cost
Costs in Aggregate Planning
Inventory Holding and Shortage Costs
=
Sl
op
e
t
os
rc
de
or
ck
ba
it
un
un
it
ho
ld
in
g
=
Backorder
Positive inventory
Costs in Aggregate Planning
• Production costs
– Straight time costs
• Labor costs, regular time ($/hour)
– Overtime and subcontracting costs
• Labor costs, overtime costs ($/hour)
• Cost of subcontracting ($/unit or $/hour)
– Idle time costs
• In most contexts, the idle time cost is zero.
• However, a non-zero cost is appropriate if idle time
has some consequences. For example, when
aggregate units are inputs to another process, idle
times may delay the process.
A Feasible Aggregate Plan
• The next slide shows a chart in which cumulative number
of units are plotted over a planning horizon.
• There are two lines:
– Production line: this line corresponds to the production
schedule and shows the cumulative number of units
produced
– Demand line: this line corresponds to the demand and
shows the cumulative net demand
• The production line is straight and its slope does not
change. This means that a constant number of units is
produced in every period.
Cumulative Number of Units
A Feasible Aggregate Plan
A feasible production
schedule
Cumulative
Net
Demand
Inventory
Period
A Feasible Aggregate Plan
• The production planning strategy in which a constant
number of units is produced in each period is called the
level strategy. Hence, the chart shows a level strategy.
• The demand line is not straight. This means that the
demand is different in different period.
• At any point of time, the difference between cumulative
production and cumulative net demand is the inventory.
Hence, the vertical difference shows the inventory.
• If shortages are not allowed, a production schedule is
feasible if the production line is always above the demand
line. Hence, the chart shows a feasible production
schedule.
A Feasible Aggregate Plan
• If the production line lies below the demand line, the
inventory is negative and shortages take place. Such a
production schedule can also be feasible if shortages are
allowed.
• Both the lines meet in the end of the planning horizon.
That means that the inventory is zero at the end of the
planning horizon. This is the end-of -horizon effect
discussed before. It is is not necessary to have a zero
inventory at the end of the planning horizon and
sometimes it is undesirable. If there is a positive inventory
at the end of the planning horizon, there will be a gap
between the production and demand lines at the end of
the planning horizon.
A Feasible Aggregate Plan
• If shortages are allowed, the production line may lie above
or below the demand line. When the production line is
above the demand line, inventory is positive and when the
production line is below the demand line, inventory is
negative.
• The opposite of the level strategy is the chase strategy. In
a chase strategy the production volume is the same as the
demand. So, the inventory is always zero. In such a case,
there is no gap between the production line and the
demand line.
Constraints
• Sometimes decision making can be constrained by
– limits on overtime
– limits on layoffs
– limits on capital available
– limits on stockouts and backorders
READING AND EXERCISES
Lesson 8
Reading:
Section 3.1 - 3.3 , pp. 113-120 (4th Ed.), pp. 108-117
(5th Ed.)
Exercise:
8, p. 121 (4th Ed.), p. 117 (5th Ed.)