Chapter 13 Aggregate

Planning
Operations Management
by
R. Dan Reid & Nada R. Sanders
2nd Edition Wiley 2005

PowerPoint Presentation by R.B. Clough - UNH

What is Aggregate
Planning?
Aggregate planning is intermediaterange (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 organizations
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:

Back orders & lost sales:

Delay delivery or allow demand to go

unfilled when demand exceeds capacity

Shift demand to off-peak times:

To meet anticipate high demand

Proactive marketing: pricing, promotions

Create new (complementary) demand

Capacity-based Options

Overtime: Short-term option

Idle time: Short-term option

Pay workers a premium to work longer hours

Slow the production rate or send workers home
early (lowers labor productivity, but doesnt 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 plans impact on customer
service and human resource issues

Evaluating Alternative
Plans

Level strategy plan

Chase strategy plan

Aggregate Planning
Example
Period
Demand

1
3000

Beginning Inventory
Beginning Workforce
Labor Standard (units/worker)

2500
18
250

Costs
Regular Time Labor Cost
Overtime/Subcontracting
Inventory Holding Cost
Backorders
Hiring
Layoff

Cost
Per Unit
$9.60
$14.40
$5.00
$7.50
$500.00
$750.00

2
6000

3
2000

4
1500

5
4000

6
5500

7
8500

Aggregate Planning
Template

Level Strategy
Aggregate Production Planning
Costs
Regular Time Labor Cost
Overtime/Subcontracting
Inventory Holding Cost
Backorders
Hiring
Layoff

Cost
Total
Total
Per Unit Units
Cost
$9.60 28000 $268,800
$14.40
0
$0
$5.00 25000 $125,000
$7.50
0
$0
$500.00
0
$0
$750.00
2
$1,500
Total Costs
$395,300

Beginning Inventory
Beginning Workforce
Labor Standard (units/worker)

2500
18
250

Period
Demand
Cumulative Demand
Net Cumulative Demand

1
3000
3000
500

2
6000
9000
6500

3
2000
11000
8500

4
1500
12500
10000

5
4000
16500
14000

6
5500
22000
19500

7
8500
30500
28000

Production/Inventory Planning
Production
Cumulative Production
Inventory (Excess Units)
Backorders (Units Short)

4000
4000
3500
0

4000
8000
1500
0

4000
12000
3500
0

4000
16000
6000
0

4000
20000
6000
0

4000
24000
4500
0

4000
28000
0
0

Capacity Planning
Workers Hired
Workers Layed Off
Workforce Available
Regular Time Capacity (units)
Overtime/Subcontracting (units)
Total Production Capacity (units)

0
2
16
4000
0
4000

0
0
16
4000
0
4000

0
0
16
4000
0
4000

0
0
16
4000
0
4000

0
0
16
4000
0
4000

0
0
16
4000
0
4000

0
0
16
4000
0
4000

Non-Financial Criteria

Operations perspective:

Human resources perspective:

Smooth & even flow is easy to manage

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 Strategy
Aggregate Production Planning
Costs
Regular Time Labor Cost
Overtime/Subcontracting
Inventory Holding Cost
Backorders
Hiring
Layoff

Cost
Total
Total
Per Unit Units
Cost
$9.60 28000 $268,800
$14.40
0
$0
$5.00
0
$0
$7.50
0
$0
$500.00
50 $25,000
$750.00
34 $25,500
Total Costs
$319,300

Beginning Inventory
Beginning Workforce
Labor Standard (units/worker)

2500
18
250

Period
Demand
Cumulative Demand
Net Cumulative Demand

1
3000
3000
500

2
6000
9000
6500

3
2000
11000
8500

4
1500
12500
10000

5
4000
16500
14000

6
5500
22000
19500

7
8500
30500
28000

Production/Inventory Planning
Production
Cumulative Production
Inventory (Excess Units)
Backorders (Units Short)

500
500
0
0

6000
6500
0
0

2000
8500
0
0

1500
10000
0
0

4000
14000
0
0

5500
19500
0
0

8500
28000
0
0

Capacity Planning
Workers Hired
Workers Layed Off
Workforce Available
Regular Time Capacity (units)
Overtime/Subcontracting (units)
Total Production Capacity (units)

0
16
2
500
0
500

22
0
24
6000
0
6000

0
16
8
2000
0
2000

0
2
6
1500
0
1500

10
0
16
4000
0
4000

6
0
22
5500
0
5500

12
0
34
8500
0
8500

Non-Financial Criteria

Operations perspective:

Human resources perspective:

Can operations ramp up & back down this

quickly?
Much more difficult to accomplish
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 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 cant 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.