Techniques for aggregate planning range from informal trial-and-error approaches, which usually

utilize simple tables or graphs, to more formalized and advanced mathematical techniques.
William Stevenson's textbook Production/Operations Management contains an informal but
useful trial-and-error process for aggregate planning presented in outline form. This general
procedure consists of the following steps:
1. Determine demand for each period.
2. Determine capacity for each period. This capacity should match demand, which means it
may require the inclusion of overtime or subcontracting.
3. Identify company, departmental, or union policies that are pertinent. For example,
maintaining a certain safety stock level, maintaining a reasonably stable workforce,
backorder policies, overtime policies, inventory level policies, and other less explicit
rules such as the nature of employment with the individual industry, the possibility of a
bad image, and the loss of goodwill.
4. Determine unit costs for units produced. These costs typically include the basic
production costs (fixed and variable costs as well as direct and indirect labor costs). Also
included are the costs associated with making changes in capacity. Inventory holding
costs must also be considered, as should storage, insurance, taxes, spoilage, and
obsolescence costs. Finally, backorder costs must be computed. While difficult to
measure, this generally includes expediting costs, loss of customer goodwill, and revenue
loss from cancelled orders.
5. Develop alternative plans and compute the cost for each.
6. If satisfactory plans emerge, select the one that best satisfies objectives. Frequently, this
is the plan with the least cost. Otherwise, return to step 5.
An example of a completed informal aggregate plan can be seen in Figure 1. This plan is an
example of a plan determined utilizing a level strategy. Notice that employment levels and output
levels remain constant while inventory is allowed to build up in earlier periods only to be drawn
back down in later periods as demand increases. Also, note that backorders are utilized in order
to avoid overtime or subcontracting. The computed costs for the individual variables of the plan
are as follows:
Output costs:
Regular time = $5 per unit
Overtime = $8 per unit
Subcontracted = $12 per unit

Other costs:
Inventory carrying cost = $3 per unit per period applied to average inventory
Backorders = $10 per unit per period
Cost of aggregate plan utilizing a level strategy:
Output costs:
Regular time = $5 1,500 = $7,500
Overtime = $8 0 = 0
Subcontracted = $10 0 = 0
Other costs:
Inventory carrying cost = $3 850 = $2,400
Backorders = $10 100 = $1,000
Total cost = $10,900
A second example, shown in Figure 2, presents the same scenario as in Figure 1 but demonstrates
the use of a combination strategy (i.e., a combination of level and chase) to meet demand and
seek to minimize costs. For this example, let's assume that company

Figure 1
policy prevents us from utilizing backorders and limits our plan to no more than 50 units of
overtime per period. Notice that the regular output level is constant, implying a level workforce,

while overtime and subcontracting are used to meet demand on a period by period basis (chase
strategy). One will notice that the cost of the combination plan is slightly lower than the cost of
the level plan.
Output costs:
Regular time = $5 1,200 = $6,000
Overtime = $8 100 = 800
Subcontracted = $12 250 = 2,500
Other costs:
Inventory carrying cost = $3 325 = 975
Backorders = $10 0 = 0
Total cost = $10,275
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