Chapter 13 – Aggregate Planning

Operations Managementby

R. Dan Reid & Nada R. Sanders2nd Edition © Wiley 2005

PowerPoint Presentation by R.B. Clough - UNH

What is Aggregate Planning?

Aggregate planning is intermediate-range (2 to 12 months) capacity planning useful in particular for organizations that experience seasonal or other fluctuation in demand.The goal of aggregate planning is to effectively utilize the organization’s resources to satisfy expected demand.

The Role of the Aggregate Plan

The Concept of Aggregation

Aggregate planning is a “big picture” approach that does not focus on individual products or services. Instead, the focus is on groups of similar products of an entire product line.Examples: Total number of bikes produced Total number of customers served

Responses to Demand Fluctuations

Demand-based options are intended to alter (smooth) the pattern of the demand.

Capacity-based options to alter capacity to better match the demand.

Demand-based Options Finished goods inventories:

To meet anticipate high demand Back orders & lost sales:

Delay delivery or allow demand to go unfilled when demand exceeds capacity

Shift demand to off-peak times: Proactive marketing: pricing, promotions

Create new (complementary) demand

Capacity-based Options Overtime: Short-term option

Pay workers a premium to work longer hours Idle time: Short-term option

Slow the production rate or send workers home early (lowers labor productivity, but doesn’t tie up capital in finished good inventories)

Subcontracting: Medium-term option Hire & fire workers: Long-term option

Change the size of the workforce

Aggregate Plan Strategies

Level plans: Use a constant workforce & produce

similar quantities each time period. Use inventories & backorders to

absorb demand peaks & valleys Chase plans:

Minimize finished good inventories by trying to keep pace with demand fluctuations

Hybrid Strategies

Use a combination of options: Build-up inventory ahead of rising

demand & use backorders to level extreme peaks

Layoff or furlough workers during lulls Subcontract production or hire temporary

workers to cover short-term peaks Reassign workers to preventive

maintenance during lulls

Developing Aggregate Plan Choose the basic strategy:

Level, chase, or hybrid Determine the production rate:

Level plan with back orders: rate = average demand over the planning horizon

Level plan without back orders: rate is set to meet all demand on time

Chase plan: assign regular production, amount of overtime & subcontracted work to meet demand

Developing the Aggregate Plan Calculate the size of the workforce

needed Calculate period-to-period inventory

levels, shortages, expected hiring & firings, and overtime

Calculate period-by-period costs, then sum for total costs of the plan

Evaluate the plan’s impact on customer service and human resource issues

Evaluating Alternative Plans

Level strategy plan Chase strategy plan

Aggregate Planning Example

Period 1 2 3 4 5 6 7Demand 3000 6000 2000 1500 4000 5500 8500

Beginning Inventory 2500Beginning Workforce 18Labor Standard (units/worker) 250

CostCosts Per Unit

Regular Time Labor Cost $9.60Overtime/Subcontracting $14.40Inventory Holding Cost $5.00Backorders $7.50Hiring $500.00Layoff $750.00

Aggregate Planning Template

Aggregate Production Planning Cost Total TotalCosts Per Unit Units Cost

Regular Time Labor CostOvertime/Subcontracting

Beginning Inventory Inventory Holding CostBeginning Workforce BackordersLabor Standard (units/worker) Hiring

LayoffTotal Costs

Period 1 2 3 4 5 6 7 8DemandCumulative DemandNet Cumulative Demand

Production/Inventory PlanningProductionCumulative ProductionInventory (Excess Units)Backorders (Units Short)

Capacity PlanningWorkers HiredWorkers Layed OffWorkforce AvailableRegular Time Capacity (units)Overtime/Subcontracting (units)Total Production Capacity (units)

Level StrategyAggregate Production Planning Cost Total Total

Costs Per Unit Units CostRegular Time Labor Cost $9.60 28000 $268,800Overtime/Subcontracting $14.40 0 $0

Beginning Inventory 2500 Inventory Holding Cost $5.00 25000 $125,000Beginning Workforce 18 Backorders $7.50 0 $0Labor Standard (units/worker) 250 Hiring $500.00 0 $0

Layoff $750.00 2 $1,500Total Costs $395,300

Period 1 2 3 4 5 6 7 8Demand 3000 6000 2000 1500 4000 5500 8500Cumulative Demand 3000 9000 11000 12500 16500 22000 30500Net Cumulative Demand 500 6500 8500 10000 14000 19500 28000

Production/Inventory PlanningProduction 4000 4000 4000 4000 4000 4000 4000Cumulative Production 4000 8000 12000 16000 20000 24000 28000Inventory (Excess Units) 3500 1500 3500 6000 6000 4500 0Backorders (Units Short) 0 0 0 0 0 0 0

Capacity PlanningWorkers Hired 0 0 0 0 0 0 0Workers Layed Off 2 0 0 0 0 0 0Workforce Available 16 16 16 16 16 16 16Regular Time Capacity (units) 4000 4000 4000 4000 4000 4000 4000Overtime/Subcontracting (units) 0 0 0 0 0 0 0Total Production Capacity (units) 4000 4000 4000 4000 4000 4000 4000

Non-Financial Criteria Operations perspective:

Smooth & even flow is easy to manage Human resources perspective:

Nobody hired or fired, no overtime or furloughs, so employee morale should be fine

Marketing perspective: All demand met, so no customer service

issues

Chase StrategyAggregate Production Planning Cost Total Total

Costs Per Unit Units CostRegular Time Labor Cost $9.60 28000 $268,800Overtime/Subcontracting $14.40 0 $0

Beginning Inventory 2500 Inventory Holding Cost $5.00 0 $0Beginning Workforce 18 Backorders $7.50 0 $0Labor Standard (units/worker) 250 Hiring $500.00 50 $25,000

Layoff $750.00 34 $25,500Total Costs $319,300

Period 1 2 3 4 5 6 7 8Demand 3000 6000 2000 1500 4000 5500 8500Cumulative Demand 3000 9000 11000 12500 16500 22000 30500Net Cumulative Demand 500 6500 8500 10000 14000 19500 28000

Production/Inventory PlanningProduction 500 6000 2000 1500 4000 5500 8500Cumulative Production 500 6500 8500 10000 14000 19500 28000Inventory (Excess Units) 0 0 0 0 0 0 0Backorders (Units Short) 0 0 0 0 0 0 0

Capacity PlanningWorkers Hired 0 22 0 0 10 6 12Workers Layed Off 16 0 16 2 0 0 0Workforce Available 2 24 8 6 16 22 34Regular Time Capacity (units) 500 6000 2000 1500 4000 5500 8500Overtime/Subcontracting (units) 0 0 0 0 0 0 0Total Production Capacity (units) 500 6000 2000 1500 4000 5500 8500

Non-Financial Criteria Operations perspective:

Can operations ramp up & back down this quickly?

Much more difficult to accomplish Human resources perspective:

Will employees tolerate being hired & fired so rapidly?

What about training & learning curve issues? Marketing perspective:

All demand is met (assuming no strikes)

A Minimum Cost Plan(Hybrid Strategy)

Aggregate Production Planning Cost Total TotalCosts Per Unit Units Cost

Regular Time Labor Cost $9.60 28000 $268,800Overtime/Subcontracting $14.40 0 $0

Beginning Inventory 2500 Inventory Holding Cost $5.00 2750 $13,750Beginning Workforce 18 Backorders $7.50 0 $0Labor Standard (units/worker) 250 Hiring $500.00 28 $14,000

Layoff $750.00 12 $9,000Total Costs $305,550

Period 1 2 3 4 5 6 7 8Demand 3000 6000 2000 1500 4000 5500 8500Cumulative Demand 3000 9000 11000 12500 16500 22000 30500Net Cumulative Demand 500 6500 8500 10000 14000 19500 28000

Production/Inventory PlanningProduction 3250 3250 2000 1500 4000 5500 8500Cumulative Production 3250 6500 8500 10000 14000 19500 28000Inventory (Excess Units) 2750 0 0 0 0 0 0Backorders (Units Short) 0 0 0 0 0 0 0

Capacity PlanningWorkers Hired 0 0 0 0 10 6 12Workers Layed Off 5 0 5 2 0 0 0Workforce Available 13 13 8 6 16 22 34Regular Time Capacity (units) 3250 3250 2000 1500 4000 5500 8500Overtime/Subcontracting (units) 0 0 0 0 0 0 0Total Production Capacity (units) 3250 3250 2000 1500 4000 5500 8500

Aggregate Planning Bottom Line

The Aggregate plan must balance several perspectives

Costs are important but so are: Customer service Operational effectiveness Workforce morale

A successful AP considers each of these factors

Service Planning Issues

Intangible products can’t be inventoried

Possible approaches: Try to proactively shift demand away

from peaks Use overtime or subcontracting to

handle peaks Allow lost sales

Chapter 13 HW Assignment

Problems 1 – 5, 10 -12.