Aggregate Planning

For academic purpose and private circulation only

Planning matches supply and demand

Intermediate Time Horizon: 6-12 months / 3-18 months

Aggregate means:

Plans are developed for product lines or families and not for individual products

Resources are also expressed in aggregate terms e.g. labor hours not specified by labor grade

Also referred to as “Sales and Operations Planning”

4-2

Aggregate Planning

During intermediate time horizon: Increasing capacity by building new facility or facility

expansion or purchasing new equipment is not an option

Available options to meet demand (in aggregate planning) are:

Manage Capacity (i.e. Hire or lay off workers; Overtime; extra shifts; subcontracting; using inventory, backlogs)

Manage Demand (i.e Promotions)

Goal is to minimize costs or maximize profit14-3

Aggregate Planning

Aggregate / Sales and Operations Planning Process

14-4

Operations convert sales plan to schedule of production per month/quater meeting demand as economically as possible

Aggregate PlanningDetermines resource capacity a firm will need

to meet demand over an intermediate time horizon

It is a process by which company determines levels of capacity, production, subcontracting, inventory, stockouts, and pricing over a specified time horizon

14-5

Disaggregation

14-6

Breaking an aggregate plan into more detailed plans

Create Master Production Schedule for Material Requirements Planning and Shop floor schedules

A

14-7

Production Planning

Aggregate Plan or Sales or Operations

Plan

Master Production Schedule

Materials Requirement Plan

Shop Floor Schedule

Items:Product lines or families

Individual Products

Components that make

the products

Manufacturing

Operations to make

each component

Time horizon

gets shorter in

moving from

aggregate plan to next lower level

Aggregate Planning

The Aggregate Planning Problem

• Given the demand forecast for each period in

the planning horizon, 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

Aggregate Planning Strategies

There are three distinct aggregate planning strategies to achieve balance among various costs:

•Chase strategy – using capacity as the lever

•Level strategy – using inventory as the lever

•Time flexibility from workforce or capacity

strategy – using utilization as the lever

Tailored or hybrid strategy – a combination of above strategies, mostly used

Chase Strategy

• Production rate varied as per demand rate

• Vary machine capacity by say hire and lay off

workers as demand varies

• Often difficult to vary capacity and workforce on

short notice

• Expensive if cost of varying machine and labor

capacity is high

• Negative effect on workforce morale

• Results in low levels of inventory

• Used when inventory holding costs are high

and costs of changing capacity are low

14-11

DemandU

nits

Time

Production

Production plan matched to demand pattern by various means especially by hiring and laying off

workers. Cost of this strategy is cost of hiring and firing workers. Useful in industries where low

skilled workers are required

Level Strategy

• Stable machine capacity and workforce levels, constant

output rate

• Either inventories are build in anticipation of demand or backlog carried over from high to low demand periods

• Inventory levels fluctuate over time

• Better for worker morale

• Large inventories and backlogs may accumulate

• Used when inventory holding and backlog costs are

relatively low

14-13

DemandU

nits

Time

Production

Sets production at a fixed rate to meet average demand per period and uses inventory to absorb

variations in demand:Cost involved in this strategy are inventory

holding and backlog costs

Time Flexibility Strategy

• Used when there is excess machine

capacity

• Workforce stable, number of hours worked

varies

• Use overtime or a flexible work schedule

• Flexible workforce, avoids morale problems

• Low levels of inventory

• Lower average machine utilization

• Used when inventory holding costs are high

and capacity is relatively inexpensive

Aggregate Planning Strategies

Three fundamental costs Trade-off available to aggregate planner are between:

•Capacity costs: Cost of varying capacity

•Inventory holding costs : Cost of holding inventory

•Backlog/lost sales costs: Cost of loosing sales or carrying backlogs from peak demand periods to low demand periods

Role of Aggregate Planning in a Supply Chain

• Specify operational parameters over the time horizon

Production quantity from regular time, overtime, and subcontracted timeWorkforce OvertimeInventory on hand BacklogSubcontracting

Information Needed foran Aggregate Plan

Aggregate demand forecast Dt for each Period t

over T periods Production costs Labor costs, regular time ($/hr) and overtime ($/hr) Subcontracting costs ($/hr or $/unit) Cost of changing capacity – hiring or layoff ($/worker),

adding or reducing machine capacity ($/machine) Labor/machine hours required per unit Inventory holding cost ($/unit/period) Stockout or backlog cost ($/unit/period) Constraints – overtime, layoffs, capital available,

stockouts, backlogs, from suppliers

Identifying Aggregate Units of Production

• Aggregate unit should be identified in a way that

the resulting production schedule can be

accomplished in practice

• Focus on the bottlenecks when selecting the

aggregate unit and identifying capacity and

production times

• Account for activities such as setups and

maintenance

Product Type

Material

Cost/ Unit ($)

Revenue/ Unit

($)

Setup Time/Batch (hour

)

Average

Batch Size

Production Time/

Unit (hour)

Net Producti

on Time/Unit (hour)

Percentage Share of Units

Sold

A 15 54 8 50 5.60 5.76 10

B 7 30 6 150 3.00 3.04 25

C 9 39 8 100 3.80 3.88 20

D 12 49 10 50 4.80 5.00 10

E 9 36 6 100 3.60 3.66 20

F 13 48 5 75 4.30 4.37 15

Identifying Aggregate Units of Production-Illustration

• Weighted average approachMaterial cost per aggregate unit = 15 x 0.10 + 7 x 0.25 + 9 x 0.20 + 12 x 0.10 + 9 x 0.20 +

13 x 0.15 = $10

• SimilarlyRevenue per aggregate unit = $40Net production time per aggregate unit = 4.00 hours

Identifying Aggregate Units of Production-Illustration

Aggregate Planning Using Linear Programming

Illustration: A case of a firm manufacturing tools

Highly seasonal demand

Month Demand Forecast

January 1,600

February 3,000

March 3,200

April 3,800

May 2,200

June 2,200

Table 8-2

Illustration

Item Cost

Material cost $10/unit

Inventory holding cost $2/unit/month

Marginal cost of stockout/backlog

$5/unit/month

Hiring and training costs $300/worker

Layoff cost $500/worker

Labor hours required 4/unit

Regular time cost $4/hour

Overtime cost $6/hour

Cost of subcontracting $30/unit

Revenue per aggregate unit = $40

Starting January Inventory: 1000 toolsPlant works for 20 days / monthEach employee works 8 hrs / dayNo employee can work more than 10 hours of

overtime / monthInventory costs are incurred at the end of each

monthAll stockouts/ backlogs to be supplied in the

following monthsAll demand to be met

4-23

Illustration

Supply Chain Manager has to generate an aggregate plan so that:

Costs is minimisedNo stockout in June endAt least 500 units of inventory at June end

4-24

Illustration

Illustration- Decision Variables

For t = 1, ..., 6

Wt = Workforce size for month t

Ht = Number of employees hired at the beginning of

month t

Lt = Number of employees laid off at the beginning of

month t

Pt = Production in month t

It = Inventory at the end of month t

St = Number of units stocked out at the end of month t

Ct = Number of units subcontracted for month t

Ot = Number of overtime hours worked in month t

Objective Function

• Minimize(Regular-time labor cost + Overtime labor cost + Cost of hiring and layoffs + Cost of holding inventory + Cost of stocking out + Cost of subcontracting + Material cost)

Constraints

• Workforce, hiring, and layoff constraints

All for t = 1,..., 6

• Capacity constraints

• Inventory balance constraints

• Overtime limit constraints

Average timein inventory